Final shape of the licensing regime for virtual asset services providers

On 21 May 2021, Hong Kong’s Financial Services and Treasury Bureau (FSTB) issued its consultation conclusions (Conclusions) on the proposed licensing regime for virtual asset services providers (VASPs). The Conclusions follow publication of the FSTB’s consultation paper of 3 November 2020 (Proposal). For details of the Proposal, please refer to our article of 24 November 2020.

The Conclusions confirm the intention set out in the Proposal for the Securities and Futures Commission (SFC) to license VASPs under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). To align with the “opt-in” eligibility requirements under the Securities and Futures Ordinance (SFO), the VASP licensing requirements will be refined to allow non-Hong Kong companies registered under the Companies Ordinance (CO) to apply for a licence. However, the requirement for a VASP licence applicant to have a permanent place of business in Hong Kong remains.

We have summarised the key licensing requirements for VASPs in the following table:

 

2020 Proposal

2021 Conclusions 

Licensing scope 

Virtual Assets (VA) is defined as “a digital representation of value that (i) is expressed as a unit of account or a store of economic value; (ii) functions (or is intended to function) as a medium of exchange accepted by the public as payment for goods or services or for the discharge of a debt, or for investment purposes; and (iii) can be transferred, stored or traded electronically”.

The definition of VA excludes digital currencies issued by central banks, financial assets regulated under the SFO and closed-loop, limited purpose items that are non-transferable, non-exchangeable and non-fungible (e.g. air miles, credit card rewards, gift cards, customer loyalty programmes and gaming coins).

In addition to the initially proposed licensing scope, flexibility will be provided to:

  • allow the SFC to prescribe additional characteristics for VA and the Secretary for Financial Services and the Treasury to determine generally or in a particular case whether any digital representation of value is regarded as a VA; and

  • expand the licensing scope to cover VA activities other than operation of VA exchanges in the future.

 

 

In-scope “regulated VA activity” is limited to the business of operating a “VA exchange”, i.e. a trading platform which is operated for the purpose of allowing an offer or invitation to be made to buy or sell any VA in exchange for any money or any VA (whether of the same or different type), and which comes into custody, control, power or possession of, or over, any money or any VA at any point during its course of business.

VA payment systems and VA custodian services will be out-scope for licensing purposes.

Eligibility requirement  

An entity applying for a VASP licence will need to be a Hong Kong incorporated company with a permanent place of business in Hong Kong. 

Refinement will be made to allow a company incorporated outside of Hong Kong and registered under the CO to apply for a VASP licence.

Licence

Period

A VASP licence granted by the SFC will remain valid until it is revoked by the SFC.  

Fit and proper requirement

Similar to “opt-in” licence applicants under the SFO, an entity applying for a VASP licence will need to satisfy the fit and proper requirements, including having at least two qualified responsible officers, with one of them as an executive director.

Conduct requirements

A licensed VASP will need to comply with terms and conditions similar to those set out in the Terms and Conditions for Virtual Asset Trading Platform Operators. They include requirements relating to:

  • limitation of services to “professional investors”, as defined in the SFO;
  • financial resources;

  • knowledge and experience;

  • soundness of business;

  • risk management;

  • segregation and management of client assets;

  • virtual asset listing and trading policies, including product due diligence;

  • financial reporting and disclosure;

  • prevention of market manipulative and abusive activities; and

  • prevention of conflicts of interests.

The SFC will publish a further consultation on the detailed regulatory requirements for VASPs. 

 

Timeline

The FSTB targets to introduce the bill amending the AMLO to provide for the VASP licence regime during the 2021-2022 legislative session. The VASP licensing regime will likely commence at the same time as the amended AMLO comes into effect. A transitional period of 180 days (and based on the Conclusions, no further extension) will be given to existing operators of VA exchanges to continue operating in Hong Kong without an SFC licence, after commencement of the VASP licensing regime. After the transitional period, it will be a criminal offence to operate a VA exchange without an SFC licence.

See the below indicative implementation timeline: 

Implications for existing VA exchanges

Hong Kong will no longer allow VA exchanges to service retail investors: whether or not a VA exchange operator is licensed as a VASP under the amended AMLO or opts in under the SFO to be licensed for Type 1 (dealing in securities) and Type 7 (providing automated trading services) regulated activities as a VA trading platform operator, it will only be permitted to offer its exchange services to professional investors.

Existing VA exchanges which are currently operating in Hong Kong and servicing retail clients will need to restructure their business in anticipation of the new regulatory requirements. That will mean changes to their relationships with existing retail clients, including what will happen with VAs in the wallets of such clients. 

Some VA exchange operators may currently bundle their exchange activities with other activities that fall outside the scope of the VASP licensing regime (e.g. providing VA ATM services). They may consider separating out their regulated and non-regulated activities to simplify their compliance requirements.

For overseas VA exchanges planning to set up in Hong Kong, it will be important to conduct a feasibility study on Hong Kong’s regulatory framework, including the in-scope of VA regulated activity, options for licensed vehicles, restrictions on asset classes and clients, and other conduct requirements.