Hong Kong FSTB Passes Rigorous Crypto Legislation

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Hong Kong FSTB Passes Rigorous Crypto Legislation

While the Hong Kong FSTB (Federal Services and the Treasury Bureau) isn’t the first to enforce legislation regarding cryptocurrencies, it aims to be one of the most “rigorous and comprehensive” regimes yet, even more so than Singapore, Japan, and the United Kingdom. 

These bold claims come directly from the legislative council brief, which goes on to say that the proposed new changes will come into effect on March 1, 2023. The amended AMLO was announced on June 14, 2022, while the first reading was on July 6. It is stated that in the time “between the enactment and commencement of the Amendment Bill, the SFC and Customs and Excise Department (C&ED) will prepare for the implementation of the new regimes including, inter alia, the preparation of rules and guidelines.”

What is the current stance on crypto in Hong Kong?

Regarding crypto regulations, at the present time there is a voluntary opt-in regime. However, until now, only one VASP has obtained an SFC (Securities and Futures Commission) license, making it the first and only regulated virtual asset service provider in Hong Kong. This VASP, OSL, has both a Type 1 license (for dealing with securities), and a Type 7 license (for providing automated trading services). 

On May 21, 2021, the Hong Kong FSTB published its consultation conclusions on regulatory proposals to improve anti-money laundering and counter financing of terrorism (AML & CFT) legislation in Hong Kong. This included a proposal for an obligatory licensing regime for VASPs in line with the suggestions of the Financial Action Task Force (FATF). 

The mandatory license will be enforced from March 1, 2023 onwards. As a VASP owner, you must submit a license application no later than December 1, 2023, or face heavy fines, and even the possibility of jail time.

Who does the new AMLO legislation affect?

You will require a license from the SFC if you;

  • Operate a virtual asset exchange in Hong Kong;
  • Operate a non-Hong Kong virtual asset exchange which actively markets to the Hong Kong public.

To be more specific, you are considered to operate a VA exchange if you provide services through means of electronic facilities in which;

  • Offers to buy or sell virtual assets are regularly made, or; persons are regularly identified to other persons in order that they may negotiate or conclude sales or purchases of virtual assets in a binding transaction, and;
  • Where client money and/or client virtual assets come into direct or indirect possession of the operator.

The aforementioned consultation conclusions specifically state that peer-to-peer exchanges, in which transactions do not go through any kind of middleman and occur directly between traders, will not be held liable to the obligatory licensing regime.

As opposed to the current opt-in rules, there is no longer any requirement for the virtual asset in question to be a “security” according to the SFO. Bitcoin, Ethereum, and stable coins will all be considered virtual assets under the new legislation. On the other hand, there are certain exemptions, such as central bank digital currencies and limited purpose digital tokens (including customer loyalty rewards points, or in-game assets).

Will non-fungible tokens (NFTs) be considered as VAs?

The SFC recently clarified the topic of non-fungible tokens, stating that “The majority of NFTs which the SFC has observed are intended to represent a unique copy of an underlying asset such as a digital image, artwork, music or video. Generally, where an NFT is a genuine digital representation of a collectible, the activities related to it do not fall within the SFC’s regulatory remit.”

However, they go on to say that NFTs structured in a form similar to “securities”, or interests in a “collective investment scheme” (CIS) may constitute a “regulated activity”. In such cases, a license will be required and the NFTs in question will be treated as VAs.

Key requirements of Hong Kong’s revised AMLO legislation

  • Deadlines. The law will be enforced from March 1, 2023, but you have until December 1, 2023, to submit a license application. If your VASP continues to operate without a license, you may incur a fine of up to HK$5 million, and a prison sentence of up to 7 years.
  • Eligibility. Only Hong Kong incorporated companies with a permanent business residence in Hong Kong, or non-Hong Kong incorporated companies which have registered in Hong Kong under the Companies Ordinance are eligible for applying for a license.
  • Fit-and-proper test. All applicants must pass the fit-and-proper person test, which is designed to ensure the applicant is lawful and competent, specifically focusing on past convictions regarding money laundering, or failing to comply with a requirement imposed under the AMLO.
  • Responsible officers. All applicants must appoint at least two (2) responsible officers who will remain responsible for AML/CFT compliance. These officers are to be held personally accountable in case of non-compliance. Only responsible officers approved by the SFC may become executive directors of a VA exchange.
  • Licensed representatives. Only SFC-licensed individuals may carry out functions on behalf of the virtual asset exchange. Licensed representatives must also pass the fit-and-proper person test.
  • Licensing conditions. The SFC may impose specific conditions on a license to a VA exchange. While the detailed regulatory requirements will be issued before the new regime comes into effect, we understand that it includes, but is not limited to:
    1. Having adequate financial resources, knowledge and experience;
    2. Risk management policies and procedures;
    3. Conditions on management of client assets;
    4. Financial reporting and disclosure;
    5. VA listing and trading policies;
    6. Prevention of manipulative and abusive activities in the market;
    7. Cybersecurity, and;
    8. Avoidance of conflicts of interest.
  • Investor protection. The licensed VA exchange will only be able to offer its services to professional investors (as defined under the SFO) initially. This is somewhat similar to the existing voluntary licensing regime.

What to do next?

It’s clear that these rigorous and comprehensive new regulations will increase the operational burden of VASPs that operate and market in Hong Kong, as well as potentially restricting retail investors by cutting off access to these VA exchanges.

All investors that have funds on VASPs that will be affected by this legislation should consider moving their virtual assets if the VA exchange does not comply.

All VASPs that will be affected by these new rules should assess their existing infrastructure. If they wish to continue operations in Hong Kong, they will need to upgrade their policies and systems. At Ospree, we can help you do exactly that – as well as getting prepared for more regulations in the future. Book our free demo now to find out how our platform could help.