Hong Kong virtual asset trading licenses issued in June: How to obtain a license and who can trade

Coinbase CEO Brian Armstrong retweeted a message from a netizen today that "Hong Kong will officially open crypto trading to all citizens in June this year", which attracted market attention.

Golden Finance found that this news may be speculation by netizens, and the source of the news came from the speech made by Hong Kong Financial Secretary Paul Chan at the web3 conference held in Hong Kong in January this year.

In his speech at the time, Chan Mo-po said, " 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 this year . Under the new system, the requirements for virtual asset exchanges in anti-money laundering, counter-terrorist financing and investor protection are consistent with the requirements currently applicable to traditional financial institutions. It is believed that this will provide a certain degree of market recognition for virtual asset exchanges. Subject to meeting relevant regulatory conditions, financial intermediaries and banks will be able to cooperate with licensed virtual asset exchanges when providing trading services to their clients."

Multiple sources have confirmed that Hong Kong will license virtual asset transactions in June 2023.

Recently, Basil Hwang, partner of Hong Kong law firm Hauzen, published an article summarizing the conditions for obtaining a Hong Kong virtual asset service provider license, which traders virtual asset exchanges can provide services to, and what penalties will be imposed for violations of regulations.

Golden Finance 0xnative compiled as follows:

Anyone who wishes to engage in 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 a criminal offense.

Under the current licensing regime, and 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 – and they will need to transition to the new regulatory regime within a prescribed transition period.

Recent history of (Hong Kong virtual asset) legislation

The current VASP implementation legislation in the form of the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022 (the “Ordinance”) provides that the licensing regime for virtual asset services will come into effect on March 1, 2023. After consultation with Hong Kong regulators, the Hong Kong government has decided to move the effective date of the new law to June 1, 2023.

Hong Kong's Under Secretary for Financial Services and the Treasury, Chan Ho-lim, previously told the South China Morning Post that "after listening to feedback from the Hong Kong Association of Banks and other regulators, we have decided to move the effective date of the legal changes to the virtual asset licensing regime to June 1, 2023. This will give the industry more time to prepare to comply with the new regulatory requirements.

What are virtual assets?

Virtual assets (VAs) under the Regulation refer to cryptographically secured digital representations of value that are in the form of units of account or storage of economic value and are used or intended to be used as a medium of exchange accepted by the public, for payment of goods or services, settlement of debts, or for investment; provide rights, qualifications or access to vote on the management, administration or governance of matters related to any cryptographically secured digital representation of value, or on any changes to the terms of any arrangement applicable to any cryptographically secured digital representation of value; and can be transmitted, stored or traded electronically.

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

Under the proposed new section 53ZRA(2) of the Regulations, the definition of VA does not include digital representations of legal tender issued by a central bank or a government; digital tokens of limited use; or digital assets that constitute securities, futures contracts, etc.

There has been much discussion in the industry about the definition of a “limited use digital token”. It has been suggested that some non-fungible tokens currently available on the market may be excluded. In the gazette of the Ordinance, Section 53ZR clarifies that any digital representation of value similar to customer loyalty or reward points or in-game assets that the issuer does not intend to convert into currency or other publicly accepted medium of exchange is a “limited use digital token”. The Bill Committee noted that “non-fungible tokens” (“NFTs”) are typically unique cryptographic tokens that exist on a blockchain and cannot be copied, and that the issuer does not intend to convert certain NFTs into currency or other publicly accepted medium of exchange. NFTs that are digital representations of collectibles are unlikely to qualify for the VA .

What are virtual asset services?

Anyone seeking to provide virtual asset services must obtain a VASP license from the SFC (section 53ZRD of the Ordinance). Schedule 3B to the Ordinance sets out the meaning of VA services. VA services means operating a VA exchange - that is, providing services through electronic facilities where users will enter into binding transactions to buy, sell or purchase VAs, and where the user's funds or VAs will be directly or indirectly controlled by the VASP service provider. A person who provides such VA services must obtain a VASP license from the SFC.

Requirements for obtaining a VASP license

Applicants for VASP licenses, their responsible officers, licensed representatives, directors and ultimate owners will need to satisfy the fit and proper test (please refer to the Fit and Proper Guidelines issued by the SFC). VASP applicants must appoint at least two responsible officers who are generally responsible for overseeing the operations of the licensed VASP and ensuring compliance with legal and other regulatory requirements. Under the Securities and Futures Ordinance (SFO), the requirements for responsible officers of VASPs are the same as those for licensed companies and require:

• At least one of the responsible officers must be the 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; and

• There must always be at least one responsible person overseeing the operations of the VASP service.

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

Emphasis on investor protection

According to the Legislative Council briefing released by the Ministry of Financial Services and Finance, VASP license applicants will be required to comply with a set of strong regulatory requirements imposed by the SFC as a condition of licensing. Investor protection will include but is not limited to:

• Consider the corporate and management structure of the VASP license applicant;

• A sound business model with detailed risk management policies and other listing and anti-market manipulation measures; and

• VASP license applicants must demonstrate that they have sufficient financial resources ( minimum amount not yet specified ) . In the initial phase of the licensing system (duration not yet specified) , licensed VASPs can only provide services to professional investors [ Golden Finance Note: Individual professional investors must hold an investment portfolio of more than HK$8 million (or equivalent foreign currency); trust corporations must hold total assets of more than HK$40 million (or equivalent foreign currency); corporations or partnerships must hold an investment portfolio of more than HK$8 million (or equivalent foreign currency) or total assets of more than HK$40 million (or equivalent foreign currency)]. Making this provision a licensing condition allows the SFC to flexibly make changes when adjustments are needed without having to amend the Ordinance.

In January 2022, the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority (Hong Kong's banking regulator) ("HKMA") issued a joint notice on virtual asset-related activities of intermediaries. The notice shows the different regulatory approaches of the Hong Kong Securities and Futures Commission and the HKMA to VAT-related activities, and stipulates different requirements for the following categories of VAT-related activities: product distribution, provision of trading services, and provision of consulting services.

For example, in terms of product distribution, complex VA products may only be offered to professional investors, and intermediaries are generally required to assess whether the client has sufficient knowledge and experience with VA-related products before trading on the intermediary platform. An exception to this rule is when the client is an institutional professional investor or a qualified corporate professional investor. The circular provides exceptions for exchange-traded VA derivatives traded on designated exchanges, and futures-based VA ETFs authorized or approved by the corresponding regulators in designated jurisdictions to be offered to retail investors and traded on designated exchanges - the professional investor-only restriction does not apply to the distribution of these products.

Hong Kong SFC's Regulatory Powers and Sanctions

The SFC will be given extensive supervisory and intervention powers, including the power to:

• Entering the business premises of licensed VASPs and related entities to conduct routine inspections and request production of documents;

• Investigate violations;

• In the event of a violation, administrative sanctions will be imposed (including censure, remedial action order, civil penalty, and suspension or revocation of license); and

• Imposing restrictions and prohibitions on the operations of licensed VASPs and their affiliated entities, where circumstances warrant.

If a person operates a VA exchange in Hong Kong without a license, or actively promotes the services of an overseas VA exchange that is not licensed in Hong Kong (whether in Hong Kong or elsewhere) to the Hong Kong public without reasonable excuse , he or she may be fined HK$5 million and imprisoned for seven years upon indictment. If the offence is a continuing offence, he or she may be fined HK$100,000 for each day during which the offence continues . A summary judgment (Golden Finance Note: Summary judgment is a judgment in common law that can be made by a judge in a simplified procedure without prosecution) will be fined HK$500,000 and imprisoned for up to two years, and a fine of HK$10,000 for each day during which the offence continues.

Implementation timeline

Below is the current expected timeline for the new VASP regulatory regime.

If you want to operate a virtual asset service in Hong Kong, what should you start doing now?

1. Appoint responsible officers for AML/CFT compliance, as each VASP applicant needs to have at least two responsible officers to oversee the operations of the licensed VASP and ensure compliance with AML/CTF and other regulatory requirements.

2. Develop internal anti-money laundering policies, procedures and controls – including risk assessments, customer due diligence measures (i.e. know your customer requirements), ongoing customer monitoring, suspicious transaction reporting, record keeping and adequate training of staff on regulatory requirements.