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Hong Kong: virtual asset service providers take shape
Following the public consultation on the legislative proposals to introduce a new licensing regime for virtual asset services providers (VASP) which aims to enhance AML/CTF regulation in Hong Kong, the FSTB issued the conclusions of the public consultation (“Consultation Conclusions”) on 21 May [1].
Summary of Key Requirements in the Licensing Regime Conclusions
Having received broad support from the respondents, there are no significant changes made to the proposed licensing regime, which were summarized in our article "Hong Kong SFC Tightens Virtual Asset Regulations". In light of its implications to operators of virtual asset (“VA”) exchanges, this article will review the key requirements together with the clarifications and minor adjustments made in the Conclusions (if any) [1], its implications to market participants, and the next steps.
Definition and Scope
| Key Points | Clarifications/Minor Adjustments | |
|---|---|---|
| Virtual Asset | 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 purpose; and (iii) can be transferred, stored, or traded electronically. | It is again clarified in the Consultation Conclusion that stored value facilities are excluded from the definition of VA. Notably, digital representations of fiat currencies (including central bank digital currencies) and other financial assets which are already regulated under the Security Futures Ordinance would not fall within the definition of VA, and therefore trading platforms which enable trading in such products would not fall within the new licensing regime. Considering the fast-evolving nature of the VA market, the FSTB will empower the Securities and Futures Commission (“SFC”) to prescribe characteristics that constitute a “virtual asset” and enable the Secretary of FSTB to determine whether any digital representation of value constitutes a VA. |
| Virtual Asset Services Provider | A VASP is defined as any trading platform that 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, and 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. | In other words, other VA activities other than VA exchange, such as over-the-counter trading or peer-to-peer trading platforms, would not be subject to the new licensing regime due to their negligible presence in Hong Kong. Consistent with the Consultation Paper, the FSTB does not rule out widening the scope of the licensing regime in the future and states that flexibility will be built into the licensing regime such that it may be expanded to cover other types of VA activities. |
Licensing Eligibility
| Key Points | Clarifications/Minor Adjustments | |
|---|---|---|
| Corporate Presence in Hong Kong | In the initial proposals, only locally incorporated companies with a permanent place of business in Hong Kong would be considered for the granting of a VASP licence. | Considering the market preference, this eligibility criteria is expanded to cover those companies incorporated overseas but registered in Hong Kong under the Companies Ordinance. With this expansion, offshore VASPs which attempt to apply for a VASP licence can establish a place of business in Hong Kong with their operating offshore entity and register it with the Hong Kong Companies Registry. |
| Fit and Proper Test | Consistent with the proposals, a licensed VASP must satisfy a fit and proper test that is applicable to other financial institutions regulated under the AMLO. This will apply to all responsible officers and ultimate owners of the corporate applicant. | |
| Responsible Officers | A licensed VASP will need to appoint at least two responsible officers to assume general responsibility of ensuring the compliance with AML/CTF requirements, and all executive directors must be made responsible officers upon SFC approval. |
Regulatory Requirements
| Key Points | Clarifications/Minor Adjustments | |
|---|---|---|
| Professional Investors | At this stage, licensed VASPs can only offer services to professional investors. Professional investors are defined as individuals with a portfolio of no less than HK$8 million, and for corporations, a portfolio of no less than HK$8 million or total assets of no less than $40 million. | In responding to some market voices of allowing service offering to retail investors, the FSTB indicates that it will continue to monitor the market dynamic and review its position as the market becomes more mature in the future. It implies that the exclusion of the retail market is temporary and part of a longer-term implementation process, without providing any indicative timeline for broadening the regime to include retail investors. |
| AML/CTF Requirements | A licensed VASP will be required to comply with the AML/CTF requirements, including customer due diligence and record keeping requirements stipulated in Schedule 2 of the AMLO. | |
| Others | Certain prescribed regulatory requirements for investor protection will be applied to licensed VASPs, e.g., soundness of the business, risk management, financial reporting and disclosure, and etc. The SFC will issue consultation on the detailed regulatory framework and requirements before commencing operation of the licensing regime. [2] |
Implications for Market Participants
VASPs should assess how they may be affected under the new licensing regime and take necessary actions. Regardless of operating in Hong Kong or elsewhere, VASPs should start by assessing whether their activities fall within the perimeter of the new licensing regime. For instance, offshore VASPs should consider the availability of their VA exchange services to the Hong Kong public under their marketing and distribution channels. It could potentially constitute as active marketing of services, which will be prohibited without a VASP license.
For any operating VASPs which attempt to apply for a VASP license or market participants that plan to actively market their VA exchange services to the Hong Kong public, they can start to review the readiness of their business and structure in fitting with the licensing eligibility and simplify the compliance, such as segregating in-scope regulated and non-regulated activities, exiting the retail customers, and considering the business formation structure as an offshore VASP.
In respect of other regulatory requirements, VASPs can prioritize to identify gaps in between their existing AML/ CTF program and the requirements under Schedule 2 of the AMLO, given that these requirements are unlikely to be materially amended during the legislative process and it takes time and resources for implementation. VASPs should also continue to monitor further proposals from the SFC in relation to other detailed regulatory requirements, so that well-defined policies and procedures and adequate internal controls can be timely prepared.
What can you do to anticipate the AMLO Amendment Bill?
The AMLO amendment bill is expected to be introduced into the Legislative Council during the 2021-22 legislative session. Upon commencement of the new licensing regime, a 180-day transitional period will be provided to the in-scope VASPs to comply with the new requirements. The licensing process is a massive exercise that takes a lot of collaborative effort and requires sufficient expertise to support. Sia Partners has the right expertise to help manage and complete the licensing process and ascertain compliance with the new regulatory requirements. We have in-depth industry knowledge and experience supported by a robust methodology, and our solution is customizable to best suit your needs.