Hong Kong Government looks to regulate virtual asset service providers and precious assets dealers under Anti-Money Laundering and Counter-Terrorist Financing Ordinance

17 November 2020, Banking & Finance, Newsletter by James Tong, Simon Deane

The Hong Kong Government has recently started a consultation with the public on its proposed amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“AMLO”). Amongst other proposed changes, having regard to the requirements imposed by the Financial Action Task Force (“FATF”), the Government proposes to introduce a licensing regime for virtual asset services providers (“VASPs”) and a two-tier registration regime for precious assets dealers.

The proposed VASP licensing regime is based upon the opt-in regulatory regime governing virtual assets trading platforms proposed by the Securities and Futures Commission (“SFC”). The regime intends to cover any person seeking to engage in the business of operating a virtual assets exchange. In addition to licensing requirements (including the customary fit-and-proper test for financial sectors), licensed VASPs will be subject to the anti-money laundering and counter-terrorist financing (“AML/CTF”) requirements of the current Schedule 2 to the AMLO. Whilst digital representations of fiat currencies will be excluded from the proposed definition of virtual assets (“VA”), stablecoins are intended to be covered.

The proposed two-tier registration regime will govern certain activities carried on by dealers in precious metals and stones (“DPMSs”), including trading, import, export, manufacturing and refining precious metals, precious stones or precious products, dealing with precious-asset-backed instruments and acting as intermediary for the aforesaid activities. DPMSs who do not intend to and will not engage in any cash transaction of at least HK$120,000 in total, whether the transaction is executed in a single operation or multiple linked operations (“Specified Cash Transactions”), will fall within Category A of the registration regime. Category A registration will almost be automatic and its registrants will not be subject to the AML/CTF obligations under Schedule 2 to the AMLO. However, DPMSs who intend to or may engage in Specified Cash Transactions will fall within Category B and must meet a fit-and-proper test, and registrants will be subject to ongoing AML/CTF obligations under the AMLO. Category B registration will also need to be renewed every three years.

The above proposed licensing and registration regimes represent a significant development of the AML/CTF regulatory regime in Hong Kong in the light of international standards and current market changes, in particular the rapid rise of VASPs and increased use of VA in Hong Kong.