Hong Kong on this Friday proposed to introduce a licensing regime for Virtual Asset Service Providers (crypto exchanges) under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“AMLO“). Hong Kong currently has a voluntary opt-in licensing regime being supervised by the Securities and Futures Commission (“SFC“).
The proposals include a range of administrative sanctions on crypto exchanges for violations with a maximum penalty of HK$ 5 million and imprisonment of 7 years. Singapore has a similar licensing regime but retail investors are permitted to trade.
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The crypto regulation proposals are part of large scope to address some technical issues identified in the FATF’s Mutual Evaluation Report on Hong Kong. The public consultation was open from 3 November 2020 to 31 January 2021 and received 79 responses including one from the law firm Baker & Mckenzie.
The Hong Kong proposal come in at a time when crypto markets have tumbled on intensified calls from Chinese authorities to crack down on crypto mining and trading. The Bitcoin value eroded 30.67% in 7 days as of 23 May 18:00 IST.
The Hong Kong crypto regulation proposals are as follows:
- Designating the business of operating a crypto exchanges exchange as a “regulated virtual asset activity” and require any person seeking to operate an exchange in Hong Kong to apply for a licence from the SFC as a licensed Virtual Asset Service Provider (“VASP”) under the AMLO.
- A Virtual Asset (VA) will be 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.
- Virtual Assets does not include digital representations of fiat currencies issued by Central banks or financial assets which are already regulated.
- Natural persons or business establishments without a legal personality will not be eligible for a VASP licence.
- Only Hong Kong incorporated companies and foreign companies incorporated elsewhere but registered in Hong Kong under the Companies Ordinance (Cap. 622) are eligible for a license.
- VASP applicants have to pass a fit-and-proper test to be considered for the granting of a VASP licence.
- Licensed VASPs will be subject to the AML/CTF requirements notably customer due diligence and record-keeping requirements.
- A licensed VASP can only offer services to professional investors and must impose rigorous criteria for the inclusion of VAs to be traded on its platform. According to the Securities and Futures (Professional Investor) Rules, an individual must have a portfolio of not less than HK$8 million to be considered as a professional investor.
- The license will be an open-ended licence, i.e., it will remain valid until the license is revoked by the SFC.
- Exchange(s) that are already regulated as a licensed corporation in the voluntary opt-in regime being supervised by the SFC are exempt from current proposals.
- Anti-Money Laundering and Counter-Terrorist Financing Review Tribunal to cover appeals against future decisions made by the SFC in implementing the licensing and supervisory regime for licensed VASPs.
The proposals can be accessed here