How Hong Kong’s stricter crypto regulations aim to boost investor confidence

Below is a guest post from Andy Lian.

Hong Kong has been a major financial hub for many years, and there has been an increasing interest in blockchain and cryptocurrency technology in recent years. The Hong Kong government has expressed its support for the development of the industry, and many initiatives are underway to create a favorable environment for cryptocurrency and blockchain businesses.

Hong Kong has a well-established regulatory framework for financial services, which has helped attract many crypto and blockchain companies. The Hong Kong Monetary Authority (HKMA) has launched several initiatives to support the development of blockchain and digital currencies. For example, the HKMA is working on developing a central bank digital currency (CBDC) and has also launched a blockchain-based trade finance platform.

Many of Hong Kong’s active blockchain and cryptocurrency communities provide support and resources to companies and developers in the industry. The city’s many blockchain and cryptocurrency-related events and conferences create networking opportunities and help drive growth in the industry.

In December 2022, Hong Kong’s Legislative Council passed an amendment to the Anti-Money Laundering and Combating the Financing of Terrorism Ordinance (AMLO) introducing a licensing regime for Virtual Asset Service Providers (VASPs).

Hong Kong’s new regulatory framework

Hong Kong recently introduced a new regulatory framework for cryptocurrency transactions and services. The updated Anti-Money Laundering Ordinance aligns with Recommendation 15 of the Financial Action Task Force (FATF) and provides virtual asset service providers (VASPs) with anti-money laundering (AML) and counter-terrorist financing (CFT) are required to comply with. Rules.

The new regulations require all VASPs operating in Hong Kong to be licensed by the Securities and Futures Commission (SFC). Without a license, an individual or company cannot offer his VA services or declare himself as a provider.

The Hong Kong government strictly regulates all activities related to the provision of virtual asset (VA) services. The term “VA Services” includes a wide range of electronic services including, but not limited to:

• (a) offer virtual assets for sale or purchase on a regular basis and enter into binding transactions; Periodically introduce or identify individuals to other parties for the purpose of, or with a reasonable expectation of, negotiating or entering into binding virtual asset transactions.
• (b) directly or indirectly control Customer’s money or Customer’s Virtual Assets in the provision of such services;

It is important to note that cryptocurrency trading platforms that enable the trading of financial instruments such as securities and futures contracts are already regulated under the Securities and Futures Ordinance and are therefore not subject to the new licensing regime. Another thing to note is that the new licensing requirements apply to all crypto exchanges registered in Hong Kong under the Companies Ordinance. This includes those based outside of Hong Kong that aggressively target Hong Kong citizens in their marketing efforts.

Prohibition of Unlicensed VA Service Providers

The Amendment Ordinance also prohibits unlicensed persons from performing regulated functions related to businesses that provide VA services. Such functions may include buying and selling virtual assets, managing virtual asset portfolios, and providing virtual asset custody services.

Unlicensed individuals or businesses are not allowed to advertise VA services in Hong Kong. The SFC can take enforcement action against unlicensed entities, including issuing fines and revoking licenses.

Impact on VASP

The new regulations will have a significant impact on VASPs operating in Hong Kong. The licensing process is rigorous and VASPs must demonstrate compliance with AML/CFT requirements. Licensed VASPs are subject to ongoing supervision and monitoring by the SFC.

The licensing process requires the VASP to provide detailed business information such as ownership structure, management team and risk management system. VASPs must also conduct customer due diligence and transaction monitoring to detect and report suspicious activity.

VASPs that do not comply with regulatory requirements can face serious consequences including fines, license revocation, and reputational damage. The regulation aims to promote a safe and stable crypto asset market in Hong Kong and protect the interests of investors and consumers.

Benefits of the new regulatory framework

Hong Kong’s new regulatory framework for virtual asset services offers several benefits for VASPs and investors. First, the regulation will provide a clear and secure legal and regulatory environment for virtual asset services in Hong Kong. This clarity helps attract more investors and companies to the market.

Second, regulation promotes transparency and accountability in crypto markets. Licensed VASPs must maintain proper records, conduct regular audits, and report suspicious activity to relevant authorities. These requirements help deter fraud and other illegal activities in the marketplace.

Third, the regulation will help promote a level playing field for all VASPs operating in Hong Kong. Our licensing process ensures that all VASPs meet the same high standards and adhere to the same regulatory requirements. This will help build a competitive and fair market for virtual asset services in Hong Kong.

How to obtain a license?

Crypto businesses must obtain a license from the Securities and Futures Commission, the securities and futures market regulator. To obtain a license, businesses must complete a criminal record check, AML/CFT performance history, financial status, education or other qualifications, reputation, experience, character, credibility, and personal financial integrity. It must pass the “proper” test. Businesses must also apply for facility approval to keep records or documents required under the ordinance. Further, each director and ultimate owner of the Applicant must be determined to be “good and fit” to be associated with the provision of VA Services.

To meet the regulatory requirements of the new ordinance, licensed crypto businesses will be required to conduct client due diligence, transaction monitoring and record keeping, client screening against international sanctions, PEP status watchlists, and client screening on unfavorable media. AML/CTF measures should be put in place, such as In addition, he must appoint a qualified auditor within one month of complying with Travel Rule requirements and becoming a licensed provider. In addition, financial statements and other documents for the prescribed period must be prepared and submitted to the Commission along with the audit report within four months after the end of the relevant fiscal year.

Licensed providers must also submit an annual report to the Commission and pay a prescribed fee within one month of the license grant date. Finally, Licensee must notify the Commission in writing of any change in information provided by Licensee or the Ultimate Owner under the requirements of the Ordinance. VA service.

The last word

The SFC has broad powers to oversee AML/CTF and regulatory compliance by licensed VASPs, including imposing sanctions. Companies operating without a license or violating AML rules can face hefty fines and imprisonment for senior management. For fraud or deception related to virtual assets, fines can reach up to 10,000,000 HKD (1,277,000 USD) and imprisonment up to 10 years.

The new regulation will come into force on 1 April 2023. Certain terms, including licensing requirements, are effective June 1, 2023. Businesses are encouraged to start preparing for the new regulations as soon as possible and review their AML/CTF. Policies and controls to identify potential gaps in requirements.

Overall, the implementation of these new regulations is expected to attract more institutional investors to Hong Kong’s cryptocurrency market as it increases confidence in the safety and legitimacy of the industry. The move also brings Hong Kong’s cryptocurrency regulation in line with global standards and best practices.

Since 2019, Hong Kong has experienced significant events that have had a profound impact on the city and its people. Hong Kong faces many challenges, including protests and political unrest, the COVID-19 pandemic, the introduction of national security laws and political changes. We hope the city’s new cryptocurrency agenda takes an important step. By embracing new technology opportunities, protecting investors and promoting transparency, Hong Kong can continue to be a leader in the global financial industry.

Some “#AnndyLian food for thought” before ending this article:

The Japanese government recognized early on that allowing retail investors to participate in the cryptocurrency market could help boost adoption and foster innovation. My question is, “Will Hong Kong follow Japan’s approach to allowing retail investors to trade cryptocurrencies in a regulated environment?”

This may be one of their selling points. i’m curious to know