Following the public consultation conducted by the Financial Services and the Treasury Bureau (“FSTB”) from November 2020 to January 2021 outlining the legislative proposals to enhance anti-money laundering and counter-terrorist financing (“AML/CTF”) regulation in Hong Kong, FSTB published the Consultation Conclusions on 21 May 2021 (the “Consultation Conclusions”). The Consultation Conclusions proposed a licensing regime for virtual asset services providers (“VASPs”), a two-tier registration regime for dealers in precious metals and stones (“DPMS”) and other technical amendments under the Anti-Money Laundering and Counter-Terrorist Financing (Cap.615)(“AMLO”). This newsletter focuses primarily on VASPs.
The Need for Regulation of VASPs
Trading of virtual assets (“VAs”), such as cryptocurrencies, has become the trend in recent years. It is generally recognised that VAs pose inherent Money Laundering / Terrorist Financing (“ML/TF”) risks to the financial system. While VAs is not legal tender in Hong Kong, they are frequently traded locally. FSTB wished to safeguard against ML/TF by introducing a licensing regime under the AMLO for VASPs.
Scope and Coverage
FSTB proposed to designate the business of operating a VA exchange as a “regulated VA activity” under the AMLO and require any person seeking to operate a VA exchange in Hong Kong to apply for a licence from the Securities and Futures Commission (“SFC”) as a licensed VASP under the AMLO.
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.”
Regarding the definition of VA, it appears that FSTB prefers more flexibility by reserving powers to alter the definition of VA to cope with the fast-developing VA industry.
|Definition of VA||
(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;
(iii) can be transferred, stored or traded electronically; and
(iv) is irrespective of the purported form of underlying assets and whether it is stable or not (i.e. the so-called “stablecoins”).
However, it is worth noting that peer-to-peer (“P2P”) trading platforms, which allow the posting of bids and offers between sellers and buyers, would not be regarded as a VA exchange, to the extent that the actual deal is transacted outside the platform and the platform is not possessing of any money or any VA by any means at any point in time. Furthermore, the Consultation Conclusions also appeared to have excluded the over-the-counter trades from the proposed new VASP licencing regime at this stage.
FSTB has set out the licensing requirements for potential VASPs whereby the applicants shall be eligible and satisfy the “Fit-and-Proper Test” before being granted a license.
|Eligible Applicant for the VASPs License||1. Companies incorporated in Hong Kong with a permanent place of business in Hong Kong|
|2. Companies incorporated in other jurisdictions but registered in Hong Kong under the Companies Ordinance (Cap. 622)|
A wide range of factors will be taken into account for the SFC to determine the integrity of the applicant as set out below:
(i) Whether the applicant has been convicted of ML/TF offences.
(ii) Whether the applicant has been convicted of other fraudulent, corruption or dishonest offences.
(iii) Whether the applicant has failed to observe AML/CTF or other regulatory requirements.
(iv) Experience and qualifications of the applicant.
(v) Good standing and financial integrity of the applicant.
(vi) Appointment of at least two responsible officers to ensure compliance with AML/CTF requirements and other regulatory requirements.
Regulatory Requirements and Powers of the SFC
Apart from the AML/CTF requirements, FSTB would require licensed VASPs to provide services to professional investors only.
The SFC is empowered to supervise the AML/CTF conduct of VASPs and enforce any regulatory requirements to ensure full compliance. The SFC also enjoys a variety of powers for enforcement, in particular, the power to enter the VASPs’ business premises for routine inspections.
A 180-day transitional period upon commencement of operation of the licensing regime is proposed to facilitate applications by interested parties.
Please contact our Partner Mr. Rodney Teoh for any enquiries or further information.
This newsletter 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.