How Hong Kong’s stricter crypto regulations aim to boost investor confidence

The following is a guest post from Anndy Lian.

Hong Kong has been a major financial hub for many years, and in recent years has shown increasing interest in blockchain and cryptocurrency technologies. The Hong Kong government has indicated its support for the industry’s development, and many initiatives are underway to help create a favorable environment for crypto and blockchain businesses.

Hong Kong has a well-established financial services regulatory framework, which has helped attract many crypto and blockchain companies. The Hong Kong Monetary Authority (HKMA) has launched several initiatives to support the development of blockchain and digital currencies. For example, the HKMA is working on developing a central bank digital currency (CBDC), and has also launched a blockchain-based trade finance platform.

Many active blockchain and cryptocurrency communities in Hong Kong provide support and resources to businesses and developers in the industry. Many events and conferences related to blockchain and cryptocurrency in the city help to create networking opportunities and promote the growth of the industry.

In December 2022, the Legislative Council of Hong Kong passed an amendment to the Anti-Money Laundering and Terrorist Financing Ordinance (AMLO), which introduced a licensing regime for Virtual Asset Providers (VASP).

Hong Kong’s new regulations

Hong Kong has recently implemented a new regulatory framework for cryptocurrency trading and services. The updated anti-money laundering regulation is in line with Financial Action Task Force (FATF) Recommendation 15, which requires virtual asset service providers (VASPs) to comply with anti-money laundering (AML) and counter-financing of terrorism (CFT). regulations.

The new regulations require all VASPs operating in Hong Kong to obtain a license from the Securities and Futures Commission (SFC). Without a license, individuals and companies cannot offer VA services or declare themselves as providers.

The Hong Kong government closely regulates all activities related to the provision of virtual asset (VA) services. The term “VA services” encompasses a wide range of electronic services which include, but are not limited to:

• (a) offer virtual assets for sale or purchase regularly, resulting in a binding transaction; regularly introduce or identify persons to other parties for the purpose of negotiating or entering into virtual asset transactions that are binding or reasonably expected to do so;
• (b) Having direct or indirect control over client money or virtual client funds in the provision of such services.

It is important to note that crypto trading platforms that allow the trading of financial products such as securities and futures contracts are not subject to the new licensing regime, as they are already regulated under the Securities and Futures Regulation. Another thing to note is that the new licensing requirements cover all crypto exchanges registered in Hong Kong under the Companies Ordinance, including those based outside Hong Kong that actively target Hong Kong citizens in their marketing efforts.

Prohibition against unlicensed VA service providers

The amended regulation also prohibits unlicensed persons from performing regulated functions related to the business of providing VA services. Such functions may include buying or selling virtual assets, managing virtual assets and providing virtual asset custody services.

Unlicensed individuals or businesses cannot advertise VA services in Hong Kong. The SFC can take enforcement action against unlicensed entities, including issuing fines and revoking licences.

Impact on VASPs

The new regulations have significant implications for VASPs operating in Hong Kong. The licensing process is rigorous and requires VASPs to demonstrate compliance with AML/CFT requirements. Licensed VASPs are subject to ongoing supervision and monitoring by the SFC.

The licensing process requires VASPs to provide detailed business information, including ownership structure, management team and risk management systems. VASPs must also conduct customer due diligence and transaction monitoring to detect and report suspicious activities.

VASPs who fail to comply with regulatory requirements can face serious consequences, including fines, license revocation and reputational damage. The regulation aims to promote a safe and stable virtual asset market in Hong Kong and protect the interests of investors and consumers.

Advantages of the new regulations

The new regulations for virtual asset services in Hong Kong have several advantages for VASPs and investors. First, the regulations provide clarity and certainty about the legal and regulatory environment for virtual asset services in Hong Kong. This clarity can help attract more investors and companies to the market.

Secondly, the regulations promote transparency and accountability in the virtual asset market. Licensed VASPs must keep proper records, conduct regular audits and report suspicious activities to relevant authorities. These requirements can help deter fraud and other illegal activities in the market.

Third, the regulations help promote a level playing field for all VASPs operating in Hong Kong. The licensing process ensures that all VASPs meet the same high standards and are subject to the same regulatory requirements. This can help create a more competitive and fair market for virtual asset services in Hong Kong.

How to get the license?

Crypto companies must obtain a license from the Securities and Futures Commission, the regulatory body for securities and futures markets. To obtain a license, the business must pass a “fit and proper” test involving a criminal background check, AML/CFT performance history, financial standing, education or other qualifications, reputation, experience, character, trustworthiness and financial integrity of the person. The business must also apply for approval of the premises to keep records or documents required in accordance with the regulation. In addition, each director of the applicant and ultimate owner must be determined “fit and proper” to be associated with providing the VA service.

In order to meet the regulatory requirements of the new regulation, licensed crypto companies must implement AML/CTF measures, including customer due diligence, transaction monitoring and record keeping, screening of customers against international sanctions and watchlists for PEP status, and screening of customers in unwanted media. They must also comply with travel rule requirements and appoint a qualified auditor within one month of becoming a licensed supplier. Furthermore, they must prepare accounts and other documents for fixed periods and send them together with the auditor’s report to the Commission within four months of the end of the financial year to which they apply.

The licensed provider must also submit an annual report to the Commission and pay a prescribed fee within one month of each anniversary of the license grant date. Finally, the licensed person must notify the Commission in writing of any change in information provided by the licensed person or the ultimate owner in accordance with the requirements of the regulation, including intended cessation of business or intention to change the address where it proposes to provide any VA -service.

Last word

The SFC will have broad powers to oversee the AML/CTF and regulatory compliance of licensed VASPs, including imposing sanctions. Companies that operate without a license or break the AML rules can risk significant fines and imprisonment for senior management. In the case of fraudulent activities or deception involving virtual assets, fines can reach up to HKD 10,000,000 (US$1,277,000) and imprisonment for up to 10 years.

The new regulations will come into force on 1 April 2023. Some provisions, including licensing requirements, will come into force on 1 June 2023. Companies are advised to start preparing for the new regulations as soon as possible and review their AML/CTF policies and controls for to identify potential gaps in the requirements.

Overall, implementation of these new regulations is expected to attract more institutional investors to the cryptocurrency market in Hong Kong, as they will have greater confidence in the industry’s security and legitimacy. The move also brings Hong Kong’s cryptocurrency regulations in line with global standards and best practices.

Hong Kong has experienced significant events since 2019 that have had a major impact on the city and its people. Hong Kong has faced many challenges, from protests and political unrest to the COVID-19 pandemic to the introduction of the National Security Law and political changes. I hope the city’s new crypto agenda pushes a critical step forward. By embracing the opportunities of new technology, protecting investors and promoting transparency, Hong Kong can continue to be a leader in the global financial industry.

Some “#AnndyLian Food for Thought” before I end this article:

The Japanese government recognized early on that allowing retail investors to participate in the cryptocurrency market could help drive adoption and promote innovation. My question is: “Will Hong Kong follow Japan’s approach of allowing retail investors to trade cryptocurrencies in a regulated environment?”

This could be one of their selling points. I’m eager to find out.