The Amendment Bill introduces a new licensing regime for Virtual Asset Service Providers (“VASPs”) and imposes statutory Anti-Money Laundering and Counter-Terrorist Financing (“AML/CTF”) regulations on them. Specifically, anyone who wishes to offer Virtual Asset (“VA”) services must apply for a license from the Securities and Futures Commission (“SFC”). This licensing regime requires the applicant to satisfy specific licensing criteria such as the “fit-and-proper” test and undertaking to offer services to professional investors only .
On 6 July 2022, the Legislative Council passed the first reading of the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (“the Amendment Bill”), which aims to further refine Hong Kong’s regulatory and legal framework regarding money laundering and terrorist financing. Upon passing all three readings, the Amendment Bill will be incorporated into the existing Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap.615) (“AMLO”). And on 24 June 2022, the Legislative Council Brief on the Amendment Bill (“LegCo Brief”) was published as a complement to the Amendment Bill by providing explanations to the proposed changes.
What exactly are ‘Virtual Assets (VAs)’ and ‘VA Services’?
According to Section 53ZRA(1) of the Amendment Bill, Virtual Assets (VAs) are defined as “a cryptographically secured digital representation”.
According to Schedule 3B of the Amendment Bill, “VA Service” refers to “operating a VA exchange, that is to say, providing services through means of electronic facilities”, whereby:
Offers to sell or purchase virtual assets are regularly made or accepted in a way that forms or results in a binding transaction; or
Persons are regularly introduced, or identified to other persons in order that they may negotiate or conclude, or with the reasonable expectation that they will negotiate or conclude sales or purchases of virtual assets in a way that forms or results in a binding transaction; and
Where client money or client virtual assets comes into direct or indirect possession of the person providing such service”.
However, it is worth noting that pursuant to the Legislative Counsel Paper dated 4 August 2022, it was clarified that the above definition seeks to capture “automated trading services provided by centralised VA exchanges” and in the case of NFTs, a person's activity in relation to such tokens will require a licence only if such activities fall within the definition of "VA services". In other words, if the trading of NFTs takes place between persons on a peer-to-peer basis, the persons would not be deemed as operating an exchange and thus need not apply for the VASP license under the Amendment Bill.
How does one get the VASP license?
One of the licensing criteria is that the VASP applicant needs to be a company incorporated locally in Hong Kong. However, if the company is formed elsewhere, it must be registered under the Company Ordinance (Cap.622) to satisfy this condition.
As mentioned above, the applicant and associated individuals must pass the SFC’s requirements for fitness and properness under Section 129(1) of the Securities and Futures Ordinance (Cap. 571). Relevant criteria include the applicant’s financial status, educational background, competency, and reputation. It will be illegal (if the Amendment Bill is passed) to operate a VA service without a license.
Are there other relevant amendments to be aware of?
There are also 3 additional criminal offences proposed by the Amendment Bill, namely the offence:
“to issue advertisements relating to unlicensed person’s provision of VA service”, and a person who commits the offence is liable on conviction to a fine at level 5 (HK$50,000) and to imprisonment for 6 months [Clause 53ZRE.];
“involving fraudulent or deceptive devices etc. in transactions in virtual assets ”, and a person who commits the offence is liable (1) on conviction on indictment to a fine of HK$10,000,000 and to imprisonment for 10 years or (2) on summary conviction to a fine of $1,000,000 and to imprisonment for 3 years [Clause 53ZRF.]; and
“to fraudulently or recklessly induce others to invest in virtual assets”, and a person who commits the offence is liable (1) on conviction on indictment to a fine of $1,000,000 and to imprisonment for 7 years or (2) on summary conviction to a fine at level 6 and to imprisonment for 6 months [Clause 53ZRG.].
How does this change the markets’ attitude towards virtual assets?
‘Cryptocurrencies’ or ‘Virtual Assets’, unless handled by professionals, is often met with confusion. The world of cryptocurrencies is developing in a highly volatile scene. In Hong Kong, the HKMA (Hong Kong Monetary Authority) categorised cryptocurrencies as virtual assets that can be traded, but originally not having any status as a legal tender.
Until recently, banks and the legal system in Hong Kong had a reluctant attitude towards companies and individuals who possess virtual assets such as cryptocurrencies and non-fungible tokens (“NFTs”). Attitudes have varied worldwide from Tesla accepting payments in bitcoin, to Mainland China ruling mining or possession of any cryptocurrency completely illegal. Both attitudes are recognisable. One side is embracing a phenomenon that cannot be ignored in today’s finance backdrop and another side is recognising the risks that forebear unforgiving consequences.
It is expected that the Amendment Bill will bring the AML/CTF regulatory regime for VASPs in Hong Kong to the same international standard as adopted by other jurisdictions such as Singapore, the United Kingdom and Japan.
How does the amendment protect VA investors and why do we need the amendment?
One of the biggest regulatory risks with VAs, specifically cryptocurrencies, is anonymity and a lack of third-party control. For example, if A wanted to send money to B, the bank would be the intermediary that controls and supervises this transaction. The absence of an intermediary in most VA-related transactions makes involved parties prone to frauds and scams. The lack of an AML/CTF regulatory regime and investor protections in VAs further attributes to the rising risks to Hong Kong’s financial system. An effective boundary to protect victims from VA frauds is therefore called for.
The Amendment Bill aims to optimise Hong Kong’s regulatory regime for combating money laundering and terrorist financing in order to fulfil Hong Kong’s obligations under the FATF (Financial Action Task Force), which is an inter-governmental body that sets international standards for combating ML/TF. Together with the additional elements of investor protection, it is expected that the regulatory regime proposed by the Amendment Bill would be more rigorous and comprehensive than those of its counterpart economies.
What will the Amendment Bill bring to existing and prospective VASPs?
Under the proposed regime, VASPs who wish to carry out VA activities in Hong Kong need to be licensed. Although the transitional period is proposed to be increased from 180 days to nine (9) months, the SFC may not be able to process all applications at the same time. The Amendment Bill therefore provides for transitional arrangements for existing operators carrying on a business of operating a VA exchange – if the operator files an application with the SFC within the first nine (9) months, the operator may be deemed to be licensed until a decision is made on its licence application by the SFC.
Given that the proposed licensing regime covers all VASPs and VA exchanges currently operating or aspire to operating in Hong Kong, it is recommended that existing and prospective VASPs should closely monitor the status of the Amendment Bill and consult proper legal advice to review whether its business falls under the definition of a VA exchange after the passage of the Amendment Bill.
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
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