By Alex Liu
Hong Kong, 9 January 2023: The first significant steps towards comprehensive crypto regulation in Hong Kong have been taken with the passing last month of legislation that will, among many provisions, require virtual asset (VA) exchanges to be licensed.
This move, however, comes as the government is re-evaluating its crypto policies, as outlined in a major announcement at FinTech Week two months ago when it unveiled a blueprint to promote the city as an international cryptocurrency and VA hub. As a result, we can expect rapid regulatory developments in this dynamic sector in the months to come.
The Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 was approved by the Legislative Council on 7 December. It aims to reinforce Hong Kong’s status as an international financial centre by reinforcing the city’s defences against money laundering and terrorist financing and by formulating a broad regulatory framework for VA activities to protect investors.
Under the amended Anti-Money Laundering and Counter-Terrorist Financing Ordinance, any person who engages in VA exchange business is required to apply for a licence from the Securities and Futures Commission (SFC). They must satisfy a “fit and proper” test and comply with anti-money laundering and counter-terrorist financing (AML/CTF) measures detailed in the Ordinance, including requirements on customer due diligence and record keeping.
Further, licensed VA exchanges need to regularly submit audited accounts and financial information to the SFC. The SFC is also given the power to enter business premises to conduct inspections or investigations.
The licensing regime for VA service providers, as well as other amendments on AML/CTF requirements, will take effect on 1 June this year. (The legislation also imposes obligations on dealers in precious metals and stones – such businesses which engage in transactions at or above HK$120,000 are required to register with the Commissioner of Customs and Excise – and this regime will take effect on 1 April this year.)
Until now, there has been an “opt in” arrangement under which VA exchanges can voluntarily apply to be licensed by the SFC, the idea being this provides clients of those businesses with peace of mind. But the scheme limits exchanges to servicing only professional investors – those with a portfolio worth at least HK$8 million – which critics say merely pushes retail investors to unregulated platforms. Since this voluntary provision was introduced in 2019, only two cryptocurrency exchanges have sought a licence.
But it appears the door to retail investors is about to be opened. This proposal is just one of a raft of measures under consideration by the Financial Services and the Treasury Bureau as detailed in its Policy Statement published on 31 October at the beginning of FinTech Week. It promises the government is “working towards providing a facilitating environment for promoting sustainable and responsible development of the VA sector in Hong Kong”. The authorities pledge to “put in place timely and necessary guardrails to mitigate actual and potential risks in line with international standards, so that VA innovations can thrive in a sustainable manner”.
The blueprint says a range of VA products and services are up for review: the development of exchange traded funds for virtual assets, property rights for tokenised assets, the legality of smart contracts and a regulatory regime for stablecoins (cryptocurrencies pegged to a stable asset, such as gold or the US dollar). The government is also exploring a number of pilot projects, including non-fungible token issuance, green bond tokenisation and e-HKD (the digital form of the local currency).
In summary, it is reasonable to say the government’s declaration is a boost to the complex and fluid VA sector which has, until now, been hampered by a degree of regulatory uncertainty and Covid-19 restrictions. After a rollercoaster year for the crypto market globally, strong governance and innovative thinking can only make Hong Kong more attractive to the digital asset industry.
A Partner in BC&C since 2000, Alex Liu’s key areas of practice include commercial and corporate litigation, investigations by governmental bodies such as the SFC, ICAC and Commercial Crime Bureau, insolvency and debt restructuring, employment matters, property and commercial contract drafting. He can be contacted at email@example.com.