Scope of the proposed licensing regime for VASPs
Under the existing voluntary opt-in regime, a firm which operates a centralised virtual asset trading platform in Hong Kong and intends to offer trading of at least one security token on the platform may apply for a licence from the SFC pursuant to the Securities and Futures Ordinance (Cap. 571) (SFO). Under the current regime, the SFC has no power to grant a licence to or supervise a platform that only trades non-security virtual assets or tokens.
The proposed licensing regime will be more encompassing and requires mandatory licensing for all virtual asset exchanges regardless of whether they are trading security or non-security virtual assets. Under the new regime, the business of operating a “virtual asset exchange” will be designated as a “regulated virtual assets activity” which requires the business to be licensed by the SFC under the AMLO.
Virtual asset exchange
The proposed definition of a “virtual asset exchange” means any trading platform operated for the purpose of allowing an offer or invitation to be made to buy or sell any virtual assets in exchange for any money or any virtual assets, and which comes into custody, control, power or possession of, or over, any money or any virtual assets at any point in time during its course of business.
Peer-to-peer trading platforms that only provide a forum for buyers and sellers of virtual assets to post their bids or offers but which trading is conducted at an outside venue, are excluded.
The proposed definition of “virtual assets” means a digital representation of value that:
On the other hand, the following are not covered in the definition of “virtual assets”:
The FSTB notes the fast-evolving nature of the virtual assets industry and will therefore build in flexibility in the legislation by empowering the SFC to further prescribe characteristics that constitute the definition of a virtual asset, and for the Secretary for Financial Services and the Treasury to determine, either generally or in a particular case, whether any digital representation of value is to be regarded as a virtual asset.
Proposed licensing requirements
Only Hong Kong incorporated companies or foreign incorporated companies registered in Hong Kong under the Companies Ordinance (Cap.622) will be considered for the granting of a VASP licence. Natural persons or business establishments without a legal personality will not be eligible.
Respondents generally supported subjecting VASP applicants to a fit-and-proper test and the criteria for determining an applicant’s fit-and-properness under the AMLO. The fit-and-proper test is proposed to cover all responsible officers and ultimate owners of the corporate entity, and any change in this relation would require prior approval by the SFC. In considering whether an applicant is a fit and proper person, the SFC will take into account, amongst others,:
To ensure the proper management of a licensed VASP, an applicant will be required to appoint at least two responsible officers, who will assume general responsibility of ensuring compliance with AML/CTF requirements and other regulatory requirements, and who will be held personally accountable in case of contravention or non-compliance of the requirements. Similar to the requirement under the SFO for licensed corporations, it is proposed that all executive directors of a licensed VASP must be made responsible officers upon approval by the SFC.
A licensed VASP will be required to comply with the AML/CTF requirements stipulated in Schedule 2 to the AMLO which cover customer due diligence and record-keeping requirements. Further, the SFC will be empowered to impose licensing conditions and implement regulatory requirements on licensed VASPs (concerning financial resources, knowledge and experience, soundness of the business, risk management, segregation and management of client assets, financial reporting and disclosure, prevention of market manipulative and abusive activities, and prevention of conflicts of interest).
For at least the initial stage of the licensing regime, a licensed VASP may only offer services to professional investors, which include high net-worth individuals with a portfolio of at least HK$8 million, corporations with portfolios of at least HK$8 million or total assets of at least HK$40 million1, or institutional investors2. This position will be monitored and reviewed as the virtual assets market matures.
Exemption and prohibition
There is no exemption in respect of the VASP licensing requirement, except for virtual assets exchanges that are already regulated as a licensed corporation under the existing voluntary opt-in regime supervised by the SFC.
The FSTB also proposed to prohibit any person who is not a licensed VASP from actively marketing, whether in Hong Kong or elsewhere, to the public of Hong Kong a regulated virtual assets activity or a similar activity elsewhere. This would have an extraterritorial effect on foreign VASPs with no operation in Hong Kong, which should avoid conducting active marketing activities targeted at the Hong Kong public if they do not want to be caught by the new licensing regime.
Supervisory powers and sanctions
The SFC will be granted extensive supervisory and intervention powers including the power to (i) enter business premises of licensed VASP and associated entities to conduct routine inspections and request production of documents, (ii) investigate non-compliance, (iii) impose administrative sanctions (including reprimands, remedial actions orders, civil penalties and suspension or revocation of licence) in case of non-compliance, and (iv) impose restrictions and prohibitions against the operation of a licensed VASP and its associated entities where the circumstances so warrant.
In addition to administrative sanctions, the carrying on of unlicensed activities and non-compliance of regulatory requirements may also result in criminal sanctions on conviction on indictment.
The Hong Kong government aims to introduce the AMLO amendment bill into the Legislative Council in the 2021-22 legislative session. The SFC will also prepare and publish for consultation the detailed regulatory requirements before commencement of the licensing regime. Upon commencement of the new regime, there will be a 180-day transitional period to facilitate licence applications by interested parties.
For advice on compliance-related issues in light of the upcoming licensing regime or virtual assets generally, please contact Joyce Chan or your usual Clyde & Co contact.
1 Per sections 5 and 6 of Securities and Futures (Professional Investor) Rules (Cap.571D)
2 General term to cover those defined under SFO’s definition of “professional investors”.