[Feature] Virtual Asset Trading in Hong Kong Will Be Licensed in June. How to Obtain a License and Who Will Be Eligible to Trade?

Brian Armstrong, CEO of Coinbase, retweeted on Twitter today about the news that 'Hong Kong will officially open cryptocurrency trading to all citizens this June', which has attracted market attention.

Jinse Finance verified that this news may be speculation by netizens, and the source of the news comes from a speech by Hong Kong Financial Secretary Paul Chan at the web3 conference held in Hong Kong in January of this year. At the time, Chan stated that “Hong Kong has completed the legislative work of setting up a licensing system for virtual asset service providers, and the new system will be implemented in June of this year. Under the new system, the requirements for anti-money laundering, counter-terrorism financing, and investor protection for virtual asset exchanges will be consistent with those currently applicable to traditional financial institutions. It is believed that this will provide a certain degree of market recognition for virtual asset exchanges. Financial intermediaries and banks will be able to cooperate with licensed virtual asset exchanges in providing trading services to customers, subject to meeting relevant regulatory conditions.”

Undoubtedly, Hong Kong will issue licenses for virtual asset trading in June 2023.

Recently, Basil Hwang, a partner at the Hong Kong law firm Hauzen, summarized the requirements for obtaining a Hong Kong virtual asset service provider license, the types of traders that virtual asset exchanges can provide services to, and the penalties for violating regulations in a post.

The following is compiled by “0xnative” from Jinse Finance:

Anyone wishing to engage in the virtual asset service business will soon need to obtain a Virtual Asset Service Provider (VASP) license issued by the Securities and Futures Commission of Hong Kong (SFC), otherwise it will be considered a crime.

Under the current licensing system, prior to the implementation of the new rules described below, only two crypto platforms, OSL Digital Securities Limited and Hash Blockchain Limited, have been licensed as cryptocurrency exchanges in Hong Kong—they will need to transition to the new regulatory regime within the prescribed transition period.

History of virtual asset legislation in Hong Kong.

Currently, the regulatory system for Virtual Asset Service Providers (VASP) is implemented in the form of the "Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Ordinance 2022" (the "Ordinance"). The licensing system for virtual asset services will start on March 1, 2023, according to the implementing regulations of the Ordinance. After consultation with Hong Kong's regulatory authorities, the Hong Kong government has decided to move the effective date of the new law to June 1, 2023. According to Edward Chan, the Under Secretary for Financial Services and the Treasury, "After listening to feedback from the Hong Kong Association of Banks and other regulatory bodies, we have decided to move the legal changes for the virtual asset licensing regime to June 1, 2023. This will give the industry more time to prepare for the new regulatory requirements."

What is Virtual Asset?

Under this ordinance, virtual assets (VAs) refer to digital representations of value that are cryptographically secured, and can be used as a medium of exchange or store of economic value and are intended to be publicly accepted for payment of goods or services, for investment purposes, or to access or purchase rights, qualifications or access, for the purposes of engaging in transactions, administrative or governance-related activities relating to any transaction involving cryptographic representation of value, or voting in connection with such arrangements, or for voting on changes to any terms applicable to any arrangement in connection with any cryptographic representation of value, and can be transmitted, stored or traded electronically.

The Minister of Financial Services and Treasury may also designate any digital representation of value as a VA.

According to the proposed new section 53ZRA(2) under the ordinance, the definition of VA does not include digital representations of fiat currencies issued by central banks or governments, limited-purpose digital tokens, or securities, futures contracts, etc.

Industry has had a lot of discussions on the definition of "limited-purpose digital tokens." Some have suggested that it could exclude some of the non-fungible tokens currently offered in the market. In the constitutional bill of the ordinance, section 53ZR clarifies that any digital representation of value, such as customer loyalty or reward points or in-game assets, that the issuer does not intend to convert into currency or other publicly accepted exchange media, is a "limited-purpose digital token." The Bills Committee noted that non-fungible tokens ("NFTs") are typically unique crypto tokens that exist on a blockchain and cannot be replicated, and that issuers do not intend to convert certain NFTs into currency or other publicly accepted exchange media. NFTs, which represent collectible items digitally, are unlikely to meet the criteria of VAs.

What are Virtual Asset Services?

Anyone seeking to provide virtual asset services must obtain a VASP license from the Securities and Futures Commission (SFC) (Section 53ZRD of the Ordinance). Appendix 3B of the Ordinance sets out the meaning of VA services. VA services mean operating a VA exchange, which provides a facility for users to trade VA on a binding basis, and where the users' funds or VA will be controlled, either directly or indirectly, by the VASP service provider. Persons providing such VA services must obtain a VASP license from the SFC.

Requirements for obtaining a VASP license

Applicants for a VASP license, their responsible personnel, licensed representatives, directors, and ultimate owners will need to meet suitability tests (see the SFC's published Fit and Proper Guidelines). VASP applicants must appoint at least two responsible personnel, who are typically responsible for overseeing the operations of the licensed VASP and ensuring compliance with legal and other regulatory requirements. According to the SFO, the requirements for VASP responsible personnel are the same as those for responsible personnel of licensed corporations, and require:

· At least one responsible officer must be an executive director of the VASP applicant;

· If the VASP applicant has more than one executive director, all of them must be appointed as responsible officers;

· At least one responsible officer must ordinarily reside in Hong Kong;

· There must always be at least one responsible officer supervising the business of the VASP service.

Hong Kong registered companies with permanent place of business in Hong Kong and non-Hong Kong companies registered under the Companies Ordinance (Chapter 622) will be eligible to obtain a VASP license. Entities without separate legal personality such as partnerships and sole proprietorships, individuals, and overseas companies not registered in Hong Kong will not be eligible to obtain a VASP license.

Prioritizing investor protection

According to a legislative brief released by the Financial Services and Treasury Bureau, VASP applicants for licenses will be required to comply with a set of strong regulatory requirements imposed by the Securities and Futures Commission as a licensing condition. Investor protection will include, but not limited to:

· Consideration of the company and management structure of the VASP license applicant;

· Sound business model with detailed risk management policies and other measures against market manipulation;

· VASP license applicants must demonstrate that they have sufficient financial resources (minimum amount not yet specified). In the initial stage of the licensing regime (duration not specified), VASPs that obtain a license can only provide services to professional investors. This provision as a licensing condition allows the Securities and Futures Commission to make flexible changes, when necessary, without amending the regulations.

In January 2022, the Securities and Futures Commission and the Hong Kong Monetary Authority (Hong Kong's banking regulator) issued a joint circular on virtual asset activities of intermediaries. The circular illustrates the different regulatory approaches of the Securities and Futures Commission and the Hong Kong Monetary Authority towards value-added tax (VAT) activities and sets out different requirements for the following categories of VAT-related activities: product distribution, providing trading services, and providing advisory services.

For instance, in the case of product distribution, complex VA products may only be provided to professional investors, and intermediaries generally need to assess whether clients have sufficient knowledge and experience of VA-related products before trading on intermediary platforms. An exception to this rule is where the client is an institutional professional investor or a qualified corporate professional investor. The circular provides exceptions for the trading of exchange-traded VA derivative products on designated exchanges, as well as for futures-based VA ETFs that are authorized or approved by the relevant regulatory authorities in designated jurisdictions for sale to retail investors and trading on designated exchanges - the restriction to professional investors only does not apply to the distribution of these products.

Hong Kong SFC’s Regulatory Powers and Sanctions

The Securities and Futures Commission (SFC) will have extensive powers of supervision and intervention, including the following powers:

· To enter the premises of licensed VASPs and related entities for routine inspections and to require the production of documents;

· To investigate misconduct;

· To impose administrative sanctions (including reprimands, remedial action orders, civil penalties, and revocation or suspension of licenses) for any misconduct; and

· To impose restrictions and prohibitions on the operation of licensed VASPs and their affiliated entities, where circumstances allow.

Operating a VA exchange in Hong Kong without a license, or actively promoting (whether in Hong Kong or elsewhere) services of an overseas VA exchange that has not obtained a license in Hong Kong without reasonable excuse, upon conviction, may be subject to a fine of HKD 5 million and imprisonment for up to 7 years, and for a continuing offence, a further fine of HKD 100,000 for every day the offence continues. Summary conviction will be liable to a fine of HKD 500,000 and imprisonment for up to 2 years, and for every day during which the offence continues, a further fine of HKD 10,000.

Implementation Schedule

The following is the current expected timeline for the new VASP regulatory regime.

What should be done now to operate virtual asset services in Hong Kong?

1. Appoint a responsible person in charge of AML/CFT compliance, as each VASP applicant is required to have at least two responsible persons to oversee the operation of the licensed VASP and ensure compliance with AML/CTF and other regulatory requirements.

2. Develop internal anti-money laundering policies, procedures, and control measures, including risk assessments, customer due diligence measures (i.e., know-your-customer requirements), ongoing monitoring of customers, reporting of suspicious transactions, record keeping, and the requirement for adequate supervision and training of employees.