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HK New Virtual Asset Service Provider Licensing Regime
24 April 2023

With effect from 1 June 2023 (“Commencement Date”), the new Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022 (“AMLAO”), will come into operation and bring into play a new licensing regime for virtual asset service providers (“VASP”) to be supervised by the Securities and Futures Commission (“SFC”).

New Licensing Regime

Under the current regulatory framework set up according to a position paper issued by the SFC in 2019, virtual asset trading platforms (“VATP”) operating in Hong Kong and offering to trade at least one security token may apply to the SFC for Type 1 (dealing in securities) and Type 7 (providing automated trading services) regulated activities licences. However, SFC has no power to grant a licence to or supervise platforms which only trade non-security virtual assets or tokens as these do not qualify as securities under Hong Kong law. The implementation of the AMLAO seeks to resolve the regulatory lacuna.

Under the AMLAO, virtual asset generally refers to a cryptographically secured digital representation of value that can be transferred, stored or traded electronically and can be used for payment or investment purposes, eg. cryptocurrencies and other asset classes in the virtual world. Virtual asset also includes cryptographically secured digital representation of value that provides rights, eligibility or access to vote on management, governance of affairs or terms applicable to any cryptographically secured digital representation, eg. governance tokens.

A digital representation of value, however, would be excluded from the definition of “virtual asset” under the AMLAO if it is issued by a central bank or government of a jurisdiction, is a limited purpose digital token, constitutes securities or futures contract, or constitutes any float or SVF deposit of a stored value facility. Customer loyalty or reward points, in-game assets or stored value card are generally not included in the definition.

Virtual asset service means operating a virtual asset exchange where virtual assets are sold and purchased through electronic facilities, or where persons are regularly introduced or identified to negotiate or conclude transactions concerning sale and purchase of virtual assets, or where client money or client virtual assets are possessed directly or indirectly through the service.

In future, the virtual asset service may be expanded to beyond virtual asset exchange service as the SFC and/or the Secretary for Financial Services and Treasury is empowered under AMLAO to vary the definition of virtual asset and virtual asset service by publishing a notice in the Gazette.

Person who carries on a business of providing a virtual asset service, or performs for and on behalf or by arrangement of a person who carries on a business of providing a virtual asset service, or actively markets the service to the public, or holding out itself/ himself as performing such function, is required to obtain a VASP licence from the SFC, regardless whether the virtual assets concerned are securities, whether the services are provided or not, or whether the services are marketed in or outside Hong Kong.

Licensing Criteria

Only companies incorporated in Hong Kong and non-Hong Kong companies registered under the Hong Kong Companies Ordinance may apply for the VASP licence. The applicant should pass the fit and proper test and have at least two responsible officers, one of whom should be available at all times to supervise the business of the virtual asset service. The responsible officers, all directors and ultimate owner of the applicant should also pass the fit and proper test.

For the fit and proper test, SFC will consider criteria like financial and solvency status, educational or other qualification, experience, ability to provide virtual asset service competently, honestly and fairly, reputation, character, reliability, financial integrity, previous offences and any other relevant matter.

SFC’s Consultation Paper

For the purpose of the new licensing regime, SFC issued a consultation paper on 20 February 2023 with a view to streamline the regulatory requirements for pre-existing licensed VATP and VASP. Under SFC’s proposal, these entities are required to comply with Guidelines for Virtual Asset Trading Platform Operators, Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations and SFC-licensed Virtual Asset Service Providers) and Prevention of Money Laundering and Terrorist Financing Guideline issued by the Securities Futures Commission for Associated Entities of Licensed Corporations and SFC-licensed Virtual Asset Service Providers. The meaning of “virtual asset” in the said guidelines include virtual asset as defined in AMLAO and any security token. This clarifies that the SFC licence will cover both security and non-security token.

Some additional arrangements have been proposed and they are highlighted below :-

1. VATPs which have put in place and follow those robust investor protection measures required by SFC (including setting up a token admission and review committee, conducting knowledge assessment and providing training for clients, setting a limit for each client, complying with the disclosure requirements etc) should be allowed to provide virtual asset service to retail investors.

2. Licensed VATPs are allowed to set up a compensation arrangement which consists of a combination of third-party insurance and funds of the licensed VATP or its group company.

3. The trading of virtual asset derivatives should be allowed.

The consultation closed on 31 March 2023.

Transitional arrangements

1. VATPs not operating in Hong Kong immediately before the Commencement Date (“Non-Pre-existing VATPs”) should not commence business until they are formally licensed.

2. Non-Pre-existing VATPs can submit licence applications to the SFC anytime after the Commencement Date.

3. During the first 12 months from the Commencement Date, it is not a contravention of AMLAO for VATPs operating in Hong Kong immediately before the Commencement Date (“Pre-existing VATPs”) to carry out the business of providing a virtual asset service without licence.

4. Pre-existing VATP who makes an application for the licence within the first 9 months beginning on 1 June 2023 and meets the conditions under AMLAO will be regarded as having a deemed licence pending determination.

Virtual asset service providers who want to have a share of the market should take note of the new requirements and be ready to comply with the laws and regulations under the new licensing regime.

If you have any questions on the above eNews or relating to any companies or commercial law matters, experienced lawyers in our firm would be happy to assist you.

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