Photo illustration by John Lyman



Hong Kong’s Virtual Asset Trading Regulations, Explained

Hong Kong’s new licensing regime for centralised virtual asset trading platforms (VATPs) is a significant development in the global push for cryptocurrency regulations. The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) will have come into effect on June 1, requiring all VATPs operating in Hong Kong or targeting Hong Kong investors to obtain a license from the Securities and Futures Commission (SFC).

This new regime is a commendable step towards bringing virtual asset trading platforms under regulatory oversight. With the rapid growth of the cryptocurrency market, it is crucial to establish robust regulatory frameworks to protect investors and prevent money laundering. By requiring VATPs to be licensed, Hong Kong aims to ensure compliance with legal and regulatory requirements and promote the responsible operation of these platforms.

The transitional arrangements outlined in the circular provide a reasonable timeline for existing VATPs to apply for a license and review their systems and controls to meet SFC standards. VATPs that have been providing virtual asset services in Hong Kong before June 1, and can demonstrate a genuine business presence will be allowed to continue operating until May 31, 2024, without breaching licensing requirements. This transitional period allows these VATPs to adjust their operations and align with the regulatory framework while maintaining continuity for their existing clients.

The eligibility criteria for the transitional arrangements focus on factors such as incorporation in Hong Kong, physical office presence, central management and control, key personnel location, and genuine trading volume. These criteria ensure that VATPs with a significant and substantial presence in Hong Kong benefit from the transitional arrangements while preventing shell companies from exploiting the system.

Additionally, individuals performing regulated functions for pre-existing VATPs are also granted a transitional period unti 2024, without breaching licensing requirements. This allows individuals to continue their roles during the transition and ensure a smooth process for both the VATPs and their employees.

Importantly, VATPs that were not operating in Hong Kong before June 1, are not eligible for the transitional arrangements. This sends a clear message that operating without a license will be considered a criminal offense.

Eligibility for transitional arrangements

As mentioned above, to be eligible for the transitional arrangements, VATPs must have been providing a service in Hong Kong before June 1. The SFC will assess the following factors to determine if a VATP is operating a genuine business within Hong Kong: Incorporation; a physical presence; central management and control exercised by a physical staff; and a live operation with clients and a genuine trading volume.

Merely setting up a company or having “shell” operations in Hong Kong will not meet the eligibility criteria.

VATPs operating in Hong Kong before June 1

VATPs that have a meaningful and substantial presence in Hong Kong before June 1, known as pre-existing VATPs, can continue to provide a service in Hong Kong until 2024 without breaching the licensing requirements. This is possible through the non-contravention arrangement. However, pre-existing VATPs must apply for a license, comply with the SFC’s standards, and ensure their systems and controls meet the legal and regulatory requirements.

Individuals performing regulated functions for pre-existing VATPs

Individuals can perform regulated functions for pre-existing VATPs until 2024 without violating the licensing requirements. This is allowed under the non-contravention arrangement. However, it is essential for individuals to ensure they comply with the applicable regulations.

VATPs not operating in Hong Kong before June 1

VATPs that were not operating in Hong Kong before June 1 are not eligible for the transitional arrangements. These VATPs should refrain from engaging in any activities in Hong Kong or actively marketing their services to Hong Kong investors until they obtain a license from the SFC. Engaging in unlicensed activities is a criminal offense.

Individuals performing regulated functions for VATPs not operating in Hong Kong before June 1

Individuals who perform, or hold themselves out as performing, regulated functions for VATPs that were not operating in Hong Kong before June 1 are also not eligible for the non-contravention arrangement. Engaging in unlicensed activities in this scenario is a criminal offense.

It is crucial for all VATPs to understand that they must obtain a license from the SFC before commencing any business activities or marketing their services to Hong Kong investors.

Enforcement actions and licensing process

The SFC has the authority to take enforcement actions against VATPs that operate without a license or fail to comply with the licensing requirements. These actions may include criminal prosecution, fines, or other regulatory measures.

For VATPs that need to obtain a license, they must go through the licensing process outlined by the SFC. The process involves submitting an application, providing relevant documentation, and demonstrating compliance with the regulatory requirements. The SFC will assess each application on a case-by-case basis, considering factors such as the VATPs financial soundness, operational capabilities, and systems and controls for combating money laundering and terrorist financing.

Ongoing compliance obligations

Once licensed, VATPs are required to maintain ongoing compliance with the regulatory obligations set out by the SFC. These obligations include:

· Implementing robust systems and controls to detect and prevent money laundering and terrorist financing activities.
· Conducting customer due diligence, including KYC (know your customer) procedures, to verify their identities.
· Reporting suspicious transactions and maintaining proper record-keeping.
· Complying with relevant regulatory requirements, such as disclosure obligations, and licensing conditions.
· Cooperating with the SFC in inspections and providing necessary information and assistance.

VATPs should ensure that their compliance frameworks are adequate and up to date to meet these obligations.

Impact on the virtual asset trading industry

The introduction of the new licensing regime for VATPs in Hong Kong aims to enhance investor protection, safeguard the integrity of the market, and mitigate the risks associated with money laundering and terrorist financing. By establishing a robust regulatory framework, the SFC aims to foster the development of a healthy and sustainable virtual asset trading industry in Hong Kong.

VATPs operating in or targeting the Hong Kong market should carefully review the licensing requirements and ensure compliance with the new regime. It is advisable to seek legal and regulatory advice to navigate the licensing process effectively and maintain ongoing compliance with regulatory obligations.

Speaking to industry experts

I had an opportunity to speak to industry experts and how they look at the current framework.

Tony Tong, Chairman of the Hong Kong Blockchain Association, said: “I welcome the [new regulations] as this will create many new job opportunities for the regulated crypto industry in Hong Kong. The issuance system for [virtual asset trading platforms] in Hong Kong has opened for applications today. Hong Kong’s comprehensive regulatory framework for virtual assets follows the principle of ‘same business, same risks, same regulation,’ with the aim of providing adequate investor protection and managing major risks. This framework promotes sustainable development and supports innovation in the industry.”

Jay Hao, former Chief Executive Officer of OKX, holds a similar view. “Hong Kong has taken a giant leap towards taming the unruly world of virtual asset trading platforms by introducing a licensing regime. They have decided to bring law and order to the Wild West of cryptocurrency. This move is seen as a positive step towards regulation, which means we can all breathe a collective sigh of relief, or at least a regulated sigh. So, let’s raise our glasses to Hong Kong’s virtual asset licensing regime- a beacon of hope in a sea of crypto confusion. It’s a step towards a more regulated and secure future, where investors can trade virtual assets without constantly looking over their shoulders. It’s time to ride off into the sunset of virtual asset regulation, knowing that Hong Kong is paving the way towards a safer and more controlled cryptocurrency frontier.”

Bitverse’s founder Win is also positive and added that his solution would also help to increase trust among users. “We are extremely excited about Hong Kong’s positive stance towards cryptocurrencies and innovation.”

Bitverse is actively building the industry’s first web3 credit wallet, based on a high-security, highly scalable, and low Gas wallet core using MPC+AA technology, along with a web3 open credit protocol built on an AI+Oracle network. The web3 credit protocol, constructed on decentralized trusted network nodes, not only facilitates various project scenarios in acquiring customers quickly and at a low cost but also enhances product competitiveness through structured enhancements. Moreover, the mechanism of “credit mining” enables highly creditworthy users from the real world to earn greater profits, thereby genuinely attracting more B2B and B2C users to participate in the entire decentralized credit value network.

The deeming arrangement introduced under the AMLO offers an opportunity for pre-existing VATPs and proposed licensed individuals to be deemed licensed from June 1, if they meet specific conditions outlined by the SFC. This provision allows for a smooth transition and avoids disruption in the operation of VATPs and the roles of licensed individuals.

The implementation of the new licensing regime and the transitional arrangements demonstrates Hong Kong’s commitment to the virtual asset trading industry. By bringing VATPs under the oversight of the SFC, the government aims to protect investors, enhance market integrity, and mitigate the risks associated with virtual asset trading. The SFC’s supervisory and disciplinary powers, along with the adherence to regulatory requirements, will ensure a more transparent and accountable virtual asset trading environment.

While the new licensing regime is a significant step forward, ongoing monitoring and continuous adaptation of regulations will be essential. The cryptocurrency market is evolving rapidly, and regulatory frameworks must keep pace to address emerging risks and challenges effectively.

Overall, Hong Kong’s new licensing regime for VATPs is a positive development for the virtual asset trading industry. It sets a precedent for other jurisdictions to follow, fostering greater trust and confidence in the market. As the global cryptocurrency landscape continues to evolve, regulatory efforts like these will play. It will be interesting to observe how Hong Kong’s stance on cryptocurrencies unfolds in the coming months and how it affects the local economy and regulatory landscape.