Under the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022 (Amended AMLO), virtual asset service providers (VASPs) must obtain a licence from the Securities and Futures Commission of Hong Kong (HKSFC) and will be subject to other regulatory requirements. The new licensing framework for VASPs, which passed on 7 December 2022, will take effect on 1 June 2023, subject to a grace period for pre-existing VASPs.

New Regulatory Regime for VASPs 

To address the risks of money laundering and terrorism financing associated with virtual asset trading activities, Hong Kong has established a new regulatory regime which requires VASPs to obtain a licence from the SFC and subjects VASPs to other compliance obligations.  

The following persons are required to obtain a licence under the Amended AMLO:

• any person in Hong Kong that carries on, or holds themselves out as carrying on, a business of providing any virtual asset service (VA Service); or
• overseas VASPs that actively market their VA Service in Hong Kong.

In this regard, the term “virtual asset” or “VA” is defined broadly and includes a digital token that (a) can be used as a medium of exchange accepted by the public for payment of goods or services, discharge of a debt or investment, such as Bitcoin and Ether, and (b) provides voting rights on the management or governance of or relating to that digital token, such as governance tokens of decentralised autonomous organisations. Virtual assets exclude limited purpose digital tokens such as customer loyalty or reward points and in-game assets.

On the other hand, the scope of VA Services subject to the new framework is currently limited to the operation of VA exchanges – that is, electronic facilities where both criteria are met: (a) offers to sell or purchase VAs resulting in binding transactions are regularly made, or persons are regularly introduced to negotiate or conclude binding transactions of VA sales or purchases, and (b) the service provider directly or indirectly possesses client money or VAs. That said, the scope of VA Services may be amended by the Secretary for Financial Services and the Treasury by notice published in the Gazette.  

In considering whether a person “actively markets” VA Services to the Hong Kong public, the HKSFC may have regard to several factors including:

• whether there is a detailed marketing plan to promote the VA service in Hong Kong;
• whether the VA services are extensively advertised (e.g., direct mailing, local newspaper advertisements, broadcasting or “push” technology over the Internet);
• whether the related marketing to Hong Kong is conducted and executed in accordance with a plan or schedule which indicates a continuing service;
• whether the VA services are packaged to target the Hong Kong public (e.g., written in Chinese and denominated in Hong Kong dollars); and
• whether the VA services are sought out by the customers on their own initiative.

Local companies incorporated in Hong Kong and foreign company branches registered in Hong Kong may apply for a VASP licence.  

Transitional Arrangements for Pre-Existing VASPs

While the licence requirement will take effect from 1 June 2023, transitional arrangements are available for Pre-Existing VASPs (i.e., VASPs carrying on the business of providing VA services in Hong Kong before 1 June 2023): 

• First 12 months from 1 June 2023 – A Pre-Existing VASP may continue to provide its VA service without a licence for up to 12 months from 1 June 2023 (i.e., until 31 May 2024).‍
• Deemed licensed after the first 12 months from 1 June 2024 – A Pre-Existing VASP will be deemed to be licensed from 1 June 2024 and may continue to provide its VA service if within the first 9 months from 1 June 2023 (i.e., on or before 29 February 2024):

            o   it makes an application to the HKSFC for a licence;

            o   it gives the HKSFC a confirmation that it has been providing the VA service in Hong Kong before 1 June 2023; and

            o   it gives the HKSFC a confirmation that upon receiving a licence to provide its VA service, it will comply with applicable regulatory requirements.

A person who is deemed licensed during the transition period must comply with the Amended AML Ordinance as if it were a licensed entity, except that:

            o   the ultimate owner does not need to be approved by the HKSFC; and

            o   the premises stated in the licence application are deemed to be the approved premises for keeping records or documents.

If the licence application is withdrawn or the HKSFC rejects the licence application, the Pre-existing VASP must cease to provide VA services in Hong Kong within 3 months from the withdrawal or rejection (where the rejection is not appealed, or the appeal is not successful).  During that 3-month period, the Pre-Existing VASP is only permitted to conduct activities for the sole purpose of ceasing the VA services.

Key Takeaway

Given the short period before the new VASP licensing regime comes into force, VASPs providing or intending to provide VA Services in Hong Kong should begin taking steps to comply with the Amended AMLO, particularly if they wish to avail of the transitional arrangements granted to Pre-Existing VASPs. Overseas VASPs should also start evaluating whether their current activities may be caught by the VASP licensing regime.

For More Information

OrionW regularly advises clients on FinTech matters.  For more information about FinTech regulations, or if you have questions about this article, please contact us at fintech@orionw.com.

Disclaimer: This article is for general information only and does not constitute legal advice.