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Authored by: Simon Deane and Chris Wong
Hong Kong will introduce an amendment to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615; “AMLO”) to the Legislative Council (“LegCo”) on 6 July 2022, with the aim of establishing a licensing regime for virtual asset service providers (“VASPs”) and dealers in precious metals and stones (“DPMS”) in Hong Kong.
The two proposed licensing regimes are as follows:-
1) A licensing regime for VASPs. Persons carrying on a business of operating a virtual asset service will be considered a VASP and will be required to obtain a licence from the Securities and Futures Commission in Hong Kong. Currently, the only proposed “virtual asset service” is operating a virtual asset exchange. A virtual asset exchange is to be defined under the amendments to the AMLO as providing services through electronic facilities whereby offers to sell/purchase virtual assets are regularly made and accepted in a way that forms or results in a binding transaction, or where persons are regularly introduced or identified to other persons so that they can or can be reasonably expected to negotiate or conclude such purchases or sales of virtual assets, and where client money or client virtual assets comes into direct or indirect possession of the person providing the service. The proposed bill provides that the definition of a “virtual asset service” may be amended by the Secretary for Financial Services and Treasury by subsidiary legislation.
Under the proposed regime, only companies will be permitted to obtain such a licence. The responsible officers and licensed representatives of the VASP will need to be fit and proper persons to manage the VASP business and engage in the provision of the virtual asset service, respectively. Licensed VASPs will be expected to comply with a set of stringent regulatory requirements, including having adequate financial resources, risk management processes, policies, etc., as well as the AML/CTF requirements of the AMLO. The proposed bill also provides that the licensed VASP may only offer services to professional investors.
2) A registration regime for DPMS. DPMS will be defined as carrying on any activities related to (i) trading in, importing or exporting precious metals, stones or products, (ii) manufacturing, refining or carrying out any value-adding work on precious metals, stones, or products, (iii) issuing, redeeming, or trading in precious-asset-backed instruments, or (iv) acting as an intermediary for the above activities.
Under the proposed bill, there will be two categories of registration. Category A registrants will be restricted from engaging in any cash transactions with customers at or above HK$120,000, and will not be subject to the requirements of the AMLO – the registration will be a simple filing process. Category B registrants will be registrants that engage in cash transactions with customers at or above HK$120,000, and will be subject to fit and proper persons tests, and the requirements of the AMLO when they engage in any transactions above HK$120,000.
The regulator of DPMS will be the Customs and Excise Department of Hong Kong, who will establish conditions of registration on the registrants on both categories.
The Amendment Bill and the introduction of the new regulatory regimes address two issues: (1) the gap in regulation of DPMS, which was highlighted in the recent report and assessment of Hong Kong’s AML measures by the Financial Action Task Force; and (2) the growing risks in relation to virtual asset businesses – as has been seen in recent problems in the virtual asset industry globally, a lack of regulation presents real risks to ordinary investors and consumers, as well as risks of money laundering and terrorism financing. It is proposed that the Amendment Ordinance will come into effect on 1 January 2023, except for the provisions relating to the VASP regime, which will come into effect on 1 March 2023.
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