This article was published by The British Chambers of Commerce in Hong Kong in the Magazine Britain in Hong Kong: Sept - Oct Issue 80, Page 28-30.
Terra Luna meltdown, high inflation and rising interest rates led to crypto winter
Over the past few years, the VA (virtual asset) market gained a lot of traction, with a total market capitalisation pushing past the USD 1 trillion mark. Regrettably, due to a multitude of factors, we are now experiencing a crypto winter. This includes crypto-centric factors such as the Terra Luna cryptocurrency coin meltdown and the withdrawal halt by Celsius, a now bankrupt cryptocurrency lending company. However, macro factors including high inflation and rising interest rates also contributed.
International bodies like the FATF (Financial Action Task Force), which aims to combat money laundering, and the IOSCO (International Organisation of Securities Commissions), the global cooperative of securities regulators, already recommended regulations to govern VA related activities in the past few years. Hence, the events leading to the current crypto winter only served as catalysts for regulators across the globe to expedite their plans to introduce regulations.
"There were rumours among VA (virtual asset) stakeholders that all VA related activities will be regulated. However, contrary to such discussions, the scope of the AMLO Amendment Bill is not as wide – because it only regulates virtual asset CEXs (centralised exchanges) with automated trading systems."
On this note, the Hong Kong government has gazetted the AMLO Amendment Bill (Anti-Money Laundering and Counter-Terrorist Financing (Amendment Bill) 2022) on 24 June 2022, putting forward a licensing regime for VASPs (Virtual Asset Service Providers), and here are answers and insights to some of the industry’s most frequently asked questions regarding the AMLO Amendment Bill.
Read more about the AMLO Amendment Bill here.
Will all VA platforms require a licence?
After the gazettal of the AMLO Amendment Bill, there were rumours among VA stakeholders that all VA related activities will be regulated. However, contrary to such discussions, the scope of the AMLO Amendment Bill is not as wide – because it only regulates virtual asset CEXs (centralised exchanges) with automated trading systems.
This issue was first addressed in the Consultation Conclusions on the Amendment Bill issued by the Financial Services and Treasury Bureau. It concluded that to regulate any person seeking to engage in the business of operating a VA exchange. Furthermore, it commented that the “presence of VA activities conducted outside VA exchanges is scanty and negligible in Hong Kong”. Thus, for the new provisions in the AMLO Amendment Bill to regulate more than VA exchanges will be beyond what was consulted and concluded.
A plain and literal interpretation of the VA service definition under the AMLO Amendment Bill may imply that various VA platforms (such as VA brokerages, VA peer-to-peer platforms, VA Over-The-Counter platforms etc.) may fall under the definition of VA Service. But as stated above, the authorities will only regulate VA exchanges which provide automated trading services. This is comparable to those provided by Type 7 Licensed Corporations (providing automated trading services). In fact, this is the current approach taken by the Hong Kong regulator with VA trading platforms under the opt-in regime.
What constitutes a “regulated function”?
Another discussion point is whether functions that were traditionally considered “back-office”, and thus do not need to be licensed (e.g. operations and IT staff responsible for developing and maintaining the automated trading service), would fall within the seemingly broad definition of “regulated function”, therefore requiring exchanges with such staff stationed in Hong Kong to be licensed.
Referring to the above-mentioned opt-in regime, back-office staff will not normally need to be licensed, so long as they do not perform functions that directly relate to the operation of the online trading platform. Applying the same thought process to the AMLO Amendment Bill, it is likely that only staff directly related to the operation of a CEX would be considered as conducting a “regulated function”. Thus, if such functions are conducted in Hong Kong, the exchange would have to be licensed. Therefore, depending on the functions of the relevant staff, they may not be considered as directly operating the exchange and will not trigger the licensing requirement.
''With the regulator’s active recruitment, it is anticipated that future vetting processes will be smoother. Fortunately, the authorities understand that market participants need time to catch up with the potential workload.''
How long will it take to receive a licence?
It is foreseeable that market participants would be worried about the time needed to obtain a licence when word on the street is that it took the SFC (Securities and Futures Commission) more than a year to approve licences for the two VA trading platforms currently licensed under the SFC’s opt-in regime.
Although the SFC did take some time to approve the VA trading platforms under the opt-in regime, the regulator should have gained solid experience since the commencement of the opt-in regime and is more familiar with the technology, products, and services involved in operating a VA exchange. Moreover, with the regulator’s active recruitment, it is anticipated that future vetting processes will be smoother. Fortunately, the authorities understand that market participants need time to catch up with the potential workload and, as long as a CEX is in operation before 1 March 2023, it will be eligible to continue its operations for a period of 12 months thereafter. If an application for a VASP licence is made within 9 months after 1 March 2023, the applicant will be deemed to be licensed until (i) the application is withdrawn, (ii) the application is refused, or (iii) a licence is granted to the applicant.
After getting licensed, can we provide services to retail investors?
Unfortunately, under the current proposal, licensed VASPs will only be allowed to provide services to professional investors. However, it was understood that during discussions at the Legislative Council’s Bills Committee meetings on the AMLO Amendment Bill, Legislative Council members questioned the authorities on whether retail investors should be allowed to trade VAs on such approved VASPs. The SFC stated that they will publicly consult on the matter and, subject to the timing and conclusion of the consultation, Hong Kong may allow VASPs to extend services to retail investors.
What does the AMLO Amendment Bill entail for CEXs currently operating in Hong Kong?
As stated above, CEXs currently operating in Hong Kong may have time until at least 1 March 2024 to continue their VA businesses. We believe that the SFC’s long-awaited guidance on the VASP regime will go a long way in clarifying the industry’s queries regarding the regulator’s requirements and conditions for VASPs and we look forward to participating in its consultation. In the meantime, we urge VA stakeholders to study the AMLO Amendment Bill, seek professional advice, and arrange your businesses in Hong Kong with reference to the regulator’s past practices and existing regimes, so that you are prepared for the dawn of the VASP regime.
This Article was written by:
Anna Lau - Partner at Ravenscroft & Schmierer
Louie Lee - Consultant at Ravenscroft & Schmierer | Founder and MD of Prosynergy
Macor Law - Associate at Prosynergy
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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