Mandatory Licensing Regime For Virtual Asset Exchanges In Hong Kong

• Published date: 05 August 2022
• Subject Matter: Intellectual Property, Government, Public Sector, Technology, Licensing & Syndication, Money Laundering, Fin Tech
• Law Firm: Goodwin Procter LLP
• Author: Ms Chi Pan, Ingram Cheung and Tingyao Pan

INTRODUCTION

Hong Kong has traditionally been a hub for digital asset businesses in the region. As regulators in Hong Kong are working to tighten the regulatory regime on virtual asset exchanges, market players and investors seeking to take advantage of the burgeoning digital asset industry should keep up-to-date with the changing regulatory landscape and policy trends.

In this article, we explore the recently proposed mandatory licensing regime for virtual asset ("VA") exchanges. The proposed mandatory licensing regime for VA trading platforms recommended by the Financial Services and the Treasury Bureau ("FSTB") of the Hong Kong Government in May 2021, as part of the proposed amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance ("AMLO")¹, seeks to replace the existing voluntary opt-in regime. The amended AMLO was gazetted on June 14, 2022, and the first reading of the amended AMLO was conducted on July 6, 2022. The proposed mandatory licensing regime is expected to take effect on March 1, 2023.²

EXISTING SFC VOLUNTARY OPT-IN REGIME

The SFC introduced the existing voluntary opt-in licensing regime for VA trading platforms in November 2019³. To date, only one VA trading platform has obtained the SFC license. Under this regime, the SFC grants a license for Type 1 (dealing in securities) or Type 7 (providing automated trading services) regulated activities to a VA trading platform that trades at least one security token which falls within the definition of "securities" under the Securities and Futures Ordinance (Cap. 571, "SFO").

On May 21, 2021, the FSTB published its consultation conclusions on legislative proposals to enhance anti-money laundering and counter-terrorist financing ("AML/CTF") regulation in Hong Kong, including a proposal to introduce a mandatory licensing regime for VA trading platforms in line with the recommendations of the Financial Action Task Force ("FATF").⁴

MANDATORY LICENSING REGIME

Under the licensing regime proposed by the amended AMLO gazetted on June 14, 2022, operating a VA exchange in Hong Kong or operating a non-Hong Kong VA exchange which actively markets to the Hong Kong public will be regarded as a "regulated VA activity" under the AMLO, requiring a license granted by the SFC.

Operating a VA exchange is defined as providing services through means of electronic facilities (a) whereby (i) offers to sell or purchase VAs are regularly made or accepted; or (ii) persons are regularly introduced, or...