VASP Included in Newly Amended Hong Kong AML Regulations

A bill to amend the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) has been passed by the Legislative Council in Hong Kong. One of the amendments to AMLO seeks to introduce a licensing regime for virtual assets service providers (VASP). An earlier proposed amendment bill specified that the licensing regime would take effect from March 1, 2023, but it has since been postponed. A circular issued by the Hong Kong Monetary Authority, states that the provisions for the regulation of VASPs will come into operation on June 1, 2023, to provide ample time for preparatory work.

The Financial Action Task Force (FATF) defines virtual asset service providers (VASP) as any natural or legal person who, as a business, conducts operations or activities such as:

• the exchange between virtual assets and fiat;
• exchange between one or more forms of virtual assets;
• transfer of virtual assets;
• virtual asset custody on behalf of clients or providing a platform that enables users to store virtual assets; and
• participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset for or, on behalf of another natural or legal person.

Hong Kong is not the only territory to announce licensing requirements for VASPs. In April, The Central Bank of Cuba announced, via released documents, that it will begin issuing VASP licenses.

Crypto Regulation and Adoption in Hong Kong

The move to issue licenses to VASPs is an indication that Hong Kong is lowering the guardrails of its strict crypto rules. The licensing regime for VASPs is a move towards legalizing retail crypto trading in Hong Kong and sustainably growing the virtual assets ecosystem.

Virtual assets are being recognized in Hong Kong as an important asset class or commodity; hence, the need to regulate them and the platforms or exchanges on which they are traded, in such a way that they are subjected to similar regulations to traditional financial institutions. Based on the new amendment, all virtual assets trading platforms will register with the Securities and Futures Commission (SFC) and be subjected to internal control, disclosure requirements, and on-premise inspection, among other compliance demands.

The SFC first released an opt-in framework for regulating and issuing licenses to crypto exchanges, in 2019. To ensure the activities of crypto exchanges fall within the purview of regulators, the SFC proposed that only virtual asset platforms that offer to trade at least one security token will be given a license. The SFC also limited the licensed exchanges to only servicing professional investors who understand the complexities of virtual assets, or investors with an investment portfolio of at least HK$8 million (~ $1 million).  The new licensing regime aims to bring virtual asset platforms under the direct purview of the SFC.

Hong Kong’s policies on cryptocurrencies differ from the stringent crypto rules of mainland China. At the Hong Kong FinTech week held in October, Hong Kong’s Financial Services and Credit Bureau issued a policy statement on virtual assets. An excerpt from the policy statement on the development of virtual assets in Hong Kong reads: “As an international financial center, Hong Kong is open and inclusive towards the global community of innovators engaging in virtual assets business. The government in conjunction with financial regulators is working towards providing a facilitating environment for promoting sustainable and responsible development of the virtual asset sector in Hong Kong.”

Hong Kong is setting the pace for the regulation of virtual assets and virtual asset platforms. With its clear-sighted crypto rules, Hong Kong is creating a crypto regulatory playbook that might serve as a template for other regulators in years to come.