Following a 3-month consultation on the proposal to introduce a licensing regime for virtual assets services providers (VASPs) in Hong Kong under the amended Anti-Money Laundering and Counter-Terrorist Financing Ordinance (the AMLO) (see our previous blog here), the Financial Services and the Treasury Bureau (FSTB) has now issued its consultation conclusions in a paper published on 21 May 2021.
Overall, there was broad support from the public (the Respondents) on the proposed licensing framework for VASPs as well as for the Securities and Futures Commission (SFC) to become the regulatory authority to supervise the regime. Save for some fine-tuning of certain parameters in the initial proposal, there are no significant changes to the licensing framework proposed. The bill to amend the AMLO is expected to be introduced into the Legislative Council in the 2021-22 legislative session.
Snapshot of the VASPs licensing regime
Who is required to be licensed?
- Any person seeking to engage in the business of operating a virtual assets (VA) exchange (VA exchange) is required to apply for a licence from the SFC (as a licensed VASP) under the AMLO. A licence granted by the SFC will be an open-ended licence i.e. it will remain valid until the licence is revoked by the SFC.
- A VA is defined as a digital representation of value that: (i) is expressed as a unit of account or a store of economic value; (ii) functions (or is intended to function) as a medium of exchange accepted by the public as payment for goods or services or for the discharge of a debt, or for investment purposes; and (iii) can be transferred, stored or traded electronically.
- A VA exchange is defined as any trading platform which is operated for the purpose of allowing an offer or invitation to be made to buy or sell any VA in exchange for any money or any VA, and which comes into custody, control, power or possession of, or over, any money or any VA at any point in time during its course of business.
- Peer-to-peer trading platforms will not be covered under the definition of “VA exchange” to the extent that: (i) the actual transaction is conducted outside the relevant platform; and (ii) the relevant platform is not involved in the underlying transaction by coming into possession of any money or any VA at any point in time.
- We note that flexibility will be built into the VASPs licensing regime such that the regime may be expanded to cover other forms of VA activities (i.e. other than VA exchanges) if deemed necessary.
What are the licensing requirements?
- To apply for a VASP licence, the applicant must either be (i) a Hong Kong incorporated company with a permanent place of business in Hong Kong; or (ii) a non-Hong Kong company registered in Hong Kong under the Companies Ordinance. It is worth noting that a considerable number of Respondents expressed the preference to widen the scope of eligible companies hence the change from the initial proposal.
- An applicant for a VASP licence must meet fit and proper requirements. The SFC will take into account certain factors in determining the fit and properness of the applicant including: (i) whether the applicant has been convicted of an ML/TF offence; (ii) the applicant’s experience and relevant qualifications; and (iv) whether the applicant is of a good standing and financial integrity.
- An applicant must appoint at least two responsible officers to assume the responsibility of ensuring compliance with the anti-money laundering and counter-terrorist financing (AML/CTF) requirements under the AMLO as well as other regulatory requirements.
What are the regulatory requirements applicable to licensed VASPs?
- A licensed VASP can only offer services to professional investors. Whilst certain Respondents took the view that a VA exchange should also be allowed to offer its services to retail investors, the FSTB considered it appropriate (at this stage) to restrict a licensee’s service offering to professional investors only given the highly speculative nature of VA activities.
- Certain prescribed regulatory requirements will apply to licensed VASPs e.g. covering financial resources, segregation of client assets, financial reporting and disclosures etc. The SFC will publish detailed requirements for consultation before the commencement of the licensing regime.
- The customer due diligence and record-keeping requirements under the AMLO will apply to licensed VASPs.
What exemptions are available?
- Apart from VA exchanges that are already regulated as a licensed corporation in the voluntary opt-in regime for virtual assets trading platforms under the Securities and Futures Ordinance (see our blog on its launch in November 2019 here), no other exemptions will be available in respect of the VASPs licensing requirement.
- There will be a 180-day transitional period upon commencement of operation of the licensing regime to facilitate application by interested parties.
- A person who is not a licensed VASP will be prohibited from actively marketing, whether in Hong Kong or elsewhere, to the public of Hong Kong a regulated VA activity or a similar activity elsewhere.
Scope of powers of the SFC under the VASPs licensing regime
- The SFC will be granted far-reaching supervisory and intervention powers including the power to: (i) enter the business premise of the licensed VASP and its associate entities for conducting routine inspections; (ii) request production of documents and other records; (iii) investigate non-compliances and to impose administrative sanctions e.g. reprimands, orders for remedial action, civil penalties, suspension or revocation of licences etc.; and (iv) impose certain restrictions and prohibitions against the operation of a licensed VASP and its associated entities e.g. to prohibit further transactions or restrict the disposal of property in case a VA exchange defaults.
- Any person who carries on any unlicensed activities or any licensee who fails to comply with regulatory requirements applicable to VASPs may be subject to criminal sanctions.
The consultation conclusions paper is available here.
 The definition of VA applies equally to virtual coins (whether stable or not) and irrespective of the purported form of underlying assets. Excluded from the definition of VA are (i) digital representations of fiat currencies (including digital currencies issued by central banks); (ii) financial assets already regulated under the Securities and Futures Ordinance; (iii) stored value facilities regulated under the Payment Systems and Stored Value Facilities Ordinance; and (iv) certain closed-loop, limited purpose items which are non-transferable, non-exchangeable and non-fungible in nature e.g. air miles, credit card rewards, customer loyalty programmes etc.