The government of Hong Kong has maintained a relaxed approach towards cryptocurrencies for years, regarding them as virtual commodities which are not legal tender, money, or payment methods.

Recently, the government has represented that it will have a more balanced approach to regulation of the cryptocurrency sphere, to ensure investor and user protection. In particular, the Amendment Bill announced in 2022, aims to introduce important changes to regulation of Virtual Assets under the auspices of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (hereinafter:-“AMLO”). “Joint Circular on Intermediaries’ Virtual Asset Related Activities” (hereinafter:-“2022 Crypto Regulation Circular”) which came into force On February 2022, serves the purpose of providing the global standards in this field. The article focuses on the how the proposed legislative changes regulatory landscape of Hong Kong’s Virtual Assets business.
New legislation which is currently under the parliamentary reading aims to develop a licensing scheme for virtual service providers (hereinafter:-“VASPs”), imposes statutory anti-money laundering and counter-terrorist financing (hereinafter:-“AML/CTF”) duties on VASPs as well as improve proper investor protection for virtual asset owners. As a result, once implemented, the VASP regime will not only impose a stringent licensing regime on VASP operators, but will also criminalize a wide range of crypto-related wrongdoing, regardless of whether it occurs on a licensed VASP exchange. The Bill is designed to govern the cryptocurrency market in Hong Kong have been presented to the members of the Legislative Council of China’s special administrative region and need their approval in two readings to become law. The provisions relating to the VASP regime is expected to take effect on March 1, 2023.
It is important to further note that, the Amendment Bill has defined a Virtual Assets (hereinafter:-“VA”) as a digital representation of value that:
either:
Finally, while the definition of a VA does not currently cover non-fungible tokens, the Amendment Bill provides that the Secretary for Financial Services and the Treasury may expand the categories of tokens captured by the “VA” definition by publication of a notice in the Gazette. (Section 53ZRA (4)(a), Amendment Bill)
The new requirements for VASPs are comparable to those that apply to traditional institutions in the financial services sector and they will have to meet similar financial adequacy requirements. Under the upcoming legislation, the SFC will also be responsible to ensure that virtual asset service providers adopt proper listing and trading policies as well as financial reporting and disclosure procedures. The Commission will also observe the implementation of mechanisms designed to prevent market manipulation and conflicts of interest.
As was mentioned before, Amendment Bill introduces a licensing regime for VASPs which provides that the business of operating a VA service – the operation of a VA exchange – is a “regulated function” requiring a license.
Entities working with cryptocurrencies that want to launch a trading platform, for example, would have to:
Another significant matter to highlight is criteria for fit and proper test. Fit and Proper test on the context of AML Amendment bill is modeled on the fit and proper requirements for the licensing of regulated activities under the Securities and Futures Ordinance (Cap. 571).
The Amendment Bill, which gave the SFC significant supervisory powers over licensed VASPs, provides that the SFC may impose a range of licensing conditions on a VASP licensee, including, but not limited to, requirements in relation to:
It’s also important to note that the Amendment Bill also provides that licensed VASPs must comply with the AMLO’s requirements such as customer due diligence and record keeping measures.
The SFC and the Hong Kong Monetary Authority (hereinafter:-“HKMA”) jointly issued a “2022 Crypto Regulation Circular” on January 28, 2022. This Circular outlines the approach to regulating the distribution of crypto assets, which include “virtual assets” and “virtual asset related items,” as well as the supply of dealing and consulting services in relation to such assets.
The Crypto Regulation Circular focuses on the provision of distribution, dealing, and consulting services in relation to crypto assets through intermediaries licensed or registered with the SFC. What matters is that the Circular imposes a number of selling restrictions on the sale of virtual asset related products – which will be very likely as complex products – with a view to investor protection. The SFC and the HKMA granted a six-month transition period for intermediaries which are already engaged in virtual asset related activities. Intermediaries which do not currently engage in virtual asset related activities should ensure compliance with the requirements in 2022 Crypto Regulation Circular before introducing such services.
Under the existing complex product regime, an intermediary should comply with enhanced suitability requirements, in particular, they should:
As a result, in order to provide adequate investors protection, intermediaries licensed by or registered with the SFC are required to:
Hong Kong’s new legislation establishes of new licensing regime, criminalizes crypto-related misconduct, imposes statutory AML/CTF obligations. Proposed amendments also covered restrictions on the sale of virtual asset related products with a view to investor protection. The first reading of the amendment bill was scheduled to took place on July 6, 2022, with the with the provisions relating to the VASP regime are due to take effect as of March 1, 2023. We keep an eye on further developments with law adoption and enforcement measures.
The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.