On 31 May 2023, the Securities and Futures Commission of Hong Kong (the “SFC”) issued a circular (the “Circular”) regarding the transitional arrangements of the new licensing regime for centralised virtual assets trading platforms (“VATPs”) under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (“AMLO”), which has come into effect on 1 June 2023. Please see our news update on consultation conclusions on proposed regulatory requirements for VATP operators licensed by the SFC published on 23 May 2023 here.
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The transitional arrangements apply to VATPs providing trading services in non-security tokens only. As such, for VATPs which intend to provide trading services in security tokens, they will continue be subject to the Hong Kong securities laws (as such the Securities and Futures Ordinance (Cap. 571) (“SFO”)) without transitional arrangement, and should commence their businesses only upon obtaining the relevant licence(s) under the SFO.
Eligibility for transitional arrangements
The transitional arrangements (i.e., a non-contravention arrangement and a deeming arrangement) aim to provide reasonably sufficient time for VATPs which are providing a virtual asset service in Hong Kong before 1 June 2023 and which are prepared to comply with the SFC’s standards to apply for a licence and to review and revise their systems and controls to cater for the applicable legal and regulatory requirements. The SFC expects those who do not plan to apply for a licence to cease any active marketing of their services to Hong Kong investors and they should proceed to an orderly closure.
To be eligible for the transitional arrangements, VATPs must be providing a virtual asset service with “meaningful and substantial presence” (i.e., carrying on a genuine business with genuine presence) in Hong Kong before 1 June 2023 (“pre-existing VATPs”), and individuals must be perform a regulated function for pre-existing VATPs operating in Hong Kong before 1 June 2023. Such VATPs and individuals may continue to provide the virtual asset service in Hong Kong within the first 12 months from 1 June 2023 (i.e., from 1 June 2023 to 31 May 2024) without being in breach of the licensing requirements under the AMLO by virtue of the non-contravention arrangement.
The factors that the SFC will consider in assessing whether a VATP is operating and carrying on a genuine business with a genuine presence in Hong Kong before 1 June 2023 include the following:
- whether it is incorporated in Hong Kong;
- whether it has a physical office in Hong Kong;
- whether its Hong Kong staff exercises central management and control over the VATP;
- whether its key personnel (e.g. those responsible for the operation of the trading system) are based in Hong Kong;
- whether the VATP’s operation is live with independent clients and genuine trading volume in Hong Kong; and
- whether there are other factors (e.g. in relation to the VATP’s trading system set-up, trading arrangements and organisational structure).
On the contrary, VATPs which were not operating in Hong Kong and individuals who perform a regulated function for a VATP operating outside Hong Kong before 1 June 2023 are not eligible for the transitional arrangements. The mere setting up of a company in Hong Kong or only having “shell” operations in Hong Kong would not suffice. They should not commence any VATP business activities in Hong Kong, or actively market any virtual asset service to Hong Kong investors, until they are licensed by the SFC.
Deeming arrangement
Pre-existing VATPs
A pre-existing VATP may be qualified for the deeming arrangement under the AMLO and can be deemed to be licensed from 1 June 2024 to conduct a business of providing a virtual asset service pending the final determination of its license application if it can meet the following deeming conditions:
- it submits a fully completed online license application to the SFC via WINGS within the first 9 months from 1 June 2023 (i.e., between 1 June 2023 and 29 February 2024);
- it confirms in the license application that:
- i. It has been providing a virtual asset service in Hong Kong immediately before 1 June 2023;
ii. It will, on being deemed to be licensed on 1 June 2024, comply with the regulatory requirements applicable to a licensed VATP; and requirements applicable to a licensed VATP;
iii. It will, on being deemed to be license on 1 June 2024, have arrangements in place to ensure it complies with the regulatory requirements applicable to a licensed VATP; - it could prove in its license application to the SFC’s satisfaction that:
- i. It has been providing a virtual asset service in Hong Kong immediately before 1 June 2023; and
ii. It has a reasonable prospect of successfully showing that it is capable of complying with the regulatory requirements applicable to a licensed VATP; and - the SFC has acknowledged receipt in writing that it has received the license application.
If the SFC considers that the VATP license applicant does not meet any one of the above deeming conditions, a no-deeming notice may be issued to the VATP to inform the VATP that the deeming arrangement will not apply to it. The VATP must then close down its business in Hong Kong by 31 May 2024 or by the expiration of the 3 months beginning on the date of issuance of the notice, whichever is later.
If the SFC considers that the pre-existing VATP meets the deeming conditions, the VATP will automatically be deemed to be licensed from 1 June 2024 until its license application is approved, withdrawn or refused (whichever is earlier).
Proposed licensed individuals of pre-existing VATPs
A licensed individual who applies to be a licensed representative (“LR”) and/or a responsible officer (“RO”) of a pre-existing VATP (the “principal”) may be qualified for the deeming arrangement under the AMLO and can be deemed to be licensed from 1 June 2024 to perform a regulated function for the principal if he/she can meet the deeming conditions. The proposed LR or RO must be performing a regulated function in Hong Kong for the VATP at the time of his/her application. If the application is an application of a proposed RO, the applicant must also prove that he/she has been performing a regulated function in Hong Kong for a VATP (whether operating in Hong Kong or elsewhere) immediately before 1 June 2023. In addition, the pre-existing VATP as well as its ROs and LRs should be able to show that they will be capable of complying with all applicable legal and regulatory requirements under the AMLO as if they were formally licensed.
License applications of pre-existing VATPs for the deeming arrangement
Timing for submitting licence applications
A license application submitted after 29 February 2024 will not qualify for the deeming arrangement, and the SFC has no power to grant an extension of the statutory deadline. VATPs that could not submit the application before the deadline must proceed to close down its business by 31 May 2024.
As the SFC may raise requisitions regarding the license application, applications may be returned to applicants to allow them to resolve the fundamental issues before submitting a new application. Hence, pre-existing VATPs are encouraged to submit their applications earlier before the deadline to reserve sufficient time for amendments.
Information to be contained in license applications
A pre-existing VATP is required to provide all the necessary information and documents in its license application, including the VATP’s policies and procedures and the external assessment report. The requirements are summarised as follows:
| Arrangements in place to comply with regulatory requirements | The VATP’s policies and procedures should cover (and the external assessment report should cover the design effectiveness of) the pre-existing VATP’s proposed structure, governance, operations, systems and controls, with a focus on key areas such as governance and staffing, token admission, custody of virtual assets, KYC, AML/CFT, market surveillance, risk management and cybersecurity. |
| RO applications | Regulatory requirements on ROs:
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| LR applications | Non-RO LR applications do not have to be submitted together with the pre-existing VATP’s license application. Nevertheless, such applications must be submitted before 29 February 2024 if the proposed LRs would like to be qualified for the deeming arrangement. |
Dual licences
To avoid contravening any of the licensing regimes and ensure business continuity, the SFC suggested that it would be appropriate for VATPs (together with their proposed ROs and LRs) to apply for approvals under both the SFO and the AMLO and become dually-licensed.
Pre-existing VATPs should submit a completed licence application (with RO applications) for a licence to carry out a business of Types 1 and 7 regulated activities under the SFO together with its application for a licence to carry out a business of providing a virtual asset service under the AMLO.
The arrangements of dual licensing applications are as follows:
• applicants for licences under both the existing SFO regime and the new AMLO regime only need to submit a single consolidated application online and indicate that they are applying for both licenses simultaneously.
• a dually-licensed VATP is required to have at least two ROs licensed under the SFO and the AMLO. For proposed ROs who mainly have virtual asset industry experience or securities-related experience, the SFC will adopt a pragmatic approach in assessing their experience for their dual licence applications.
Analysis and Takeaways
This Circular is released to address the wide-ranging questions that were raised during the consultation period regarding the transitional arrangements of the new licensing regime for VATPs. It is believed that the Circular would provide further guidance on the compliance with the new licensing regime, in particular the interactions between the non-contravention arrangment and deeming arrangements, as well as the duality nature of the SFO and AMLO licences.
As the SFC had emphasised in the Circular, a VATP who intends to rely on the deeming arrangement must submit its full licence application by the statutory deadline of 29 February 2024. Any late submissions by the pre-existing VATPs will not be considered and their businesses must be closed down by 31 May 2024 or by the expiry of the 3 months beginning on the day of the issuance of the no-deeming notice (whichever is later). In order to ensure successful reliance of deeming arrangement, eligible VATPs should consider preparing and finalising the required information and documents for early submission and seek professional assistance if necessary.
Please contact our Partner Mr. Rodney Teoh for any enquiries or further information.
This news update is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.