Introduction

Hong Kong’s virtual asset service providers (“VASPs”) may have their hands tied from 1 March 2023. On 24 June 2022, the Hong Kong government gazetted the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (the “Bill”) to introduce a licensing regime for reining in VASPs.

The proposed regime is modelled on the existing regime for service providers in the securities and futures markets under the Securities and Futures Ordinance (the “SFO”). Again, the Securities and Futures Commission (the “Commission”) will be responsible for administering the new regime for virtual assets.

Licensing regime

When will the regime take effect?

The proposed commencement date of the licensing regime is 1 March 2023.

What is a virtual asset?

“VA” or “virtual asset”, subject to certain exclusions, means:

1.       “a cryptographically secured digital representation of value that—

a.       is expressed as a unit of account or a store of economic value;

b.       either—

i.         is used, or is intended to be used, as a medium of exchange accepted by the public, for any one or more of the following purposes—

1.         payment for goods or services;

2.         discharge of a debt;

3.         investment; or

ii.       provides rights, eligibility or access to vote on the management, administration or governance of the affairs in connection with, or to vote on any change of the terms of any arrangement applicable to, any cryptographically secured digital representation of value;

c.       can be transferred, stored or traded electronically; and

d.       satisfies other characteristics prescribed by the Commission under subsection (3)(a); or

2.       a digital representation of value prescribed as a virtual asset by notice published under subsection (4)(a).”

Some examples of the exclusions from the definition of “VA” or “virtual asset” are:

1.       a digital representation of value which is issued by a central bank or a government;

2.       a limited purpose digital token which includes:

a.       a customer loyalty or reward point; and

b.       an in-game asset;

3.       a securities or futures contract (which is regulated under the SFO).

The Secretary for Financial Services and the Treasury have power to prescribe any digital representation of value to be or not to be a virtual asset by notice published in the Gazette.

The broad definition of “virtual asset” will capture Bitcoin and Stablecoins as expected. On the other hand, it is unclear whether non-fungible tokens (“NFTs”) are considered virtual assets. It may be argued that NFTs are not intended to be used as a medium of exchange, and do not provide rights to vote on the management of the affairs in connection with any cryptographically secured digital representation of value.

Who needs a licence?

The following persons will need to obtain a licence:

1.       Any person in Hong Kong that carries on a business of providing any virtual asset (“VA”) service or holds themselves out as carrying on a business of providing any VA service;

2.       Any person outside Hong Kong that (i) actively markets to the public in Hong Kong any services the person provides or purports to provide, and (ii) the provision of such services, if done in Hong Kong, would constitute providing a “VA service”.

“VA service” means:

“Operating a VA exchange, that is to say, providing services through means of electronic facilities—

1.    whereby—

a.         offers to sell or purchase virtual assets are regularly made or accepted in a way that forms or results in a binding transaction; or

b.         persons are regularly introduced, or identified to other persons in order that they may negotiate or conclude, or with the reasonable expectation that they will negotiate or conclude sales or purchases of virtual assets in a way that forms or results in a binding transaction; and

2.    where client money or client virtual assets comes into direct or indirect possession of the person providing such service.”

The definition of “VA service” means that operating a virtual asset payment system or providing custodian services does not require a licence.

What are the requirements for obtaining a licence?

The license applicant must be an incorporated company with a permanent place of business in Hong Kong or a company incorporated elsewhere but registered in Hong Kong under the Companies Ordinance (Cap. 622) and must demonstrate the followings:

1.       it is a fit and proper person to be licensed to provide the VA service;

2.       it has at least 2 persons fit and proper to be responsible officers (“ROs”), each of whom are of sufficient authority within the applicant and at least one of whom must be an executive director;

3.       each director of the applicant is fit and proper; and

4.       the ultimate beneficial owner of the applicant is fit and proper to be the ultimate beneficial owner of a VASP licensee.

What are the obligations of a license?

After obtaining a licence, the service provider will be subject to various ongoing obligations, such as:

1.       notifying the Commission when:

a.       there is any change in information relating to the licensed provider or its ultimate owner;

b.       it changes its business address or directors;

c.       it intends to cease business; or

d.       a licensed representative ceases to act for it;

2.       paying annual fees and filing annual returns; and

3.       preparing and filing audited accounts.

The Hong Kong regulatory regime will be more rigorous and comprehensive than similar regimes in Singapore, the UK and Japan. In particular, at the initial stage, the service providers will only be able to provide services to professional investors (likely in the form of a licensing condition, which may be relaxed at a later stage).

Consequence of providing virtual asset services without a licence

Operating a VA exchange in Hong Kong without a licence, or actively marketing (whether in Hong Kong or elsewhere) to the public of Hong Kong the services of an overseas VA exchange that is not licensed in Hong Kong, without a reasonable excuse, will be an offence punishable on conviction on indictment, to a fine of HK$5 million and to imprisonment for seven years and, in the case of a continuing offence, to a further fine of HK$100,000 for every day during which the offence continues. A summary conviction will see fines of HK$500,000 and imprisonment of 2 years, and a further fine of HK$10,000 for every day during which the offence continues.

Besides, any person:-

1.       making a false or misleading statement in a material particular in respect of his application for VASP licence is liable to a fine of HK$1 million and imprisonment of two years;

2.       making a fraudulent or reckless misrepresentation for the purpose of inducing another person to acquire or dispose of a VA, whether or not the transaction is conducted (or proposed to be conducted) within or outside a licensed VA Exchange, is liable to a fine of HK$1 million and imprisonment of seven years.

In addition, non-compliance with the statutory AML/CTF requirements under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Chapter 615) is a criminal offence, whereby the licensed VASP and its ROs are liable to a fine of HK$1 million and imprisonment of two years.

What should an existing virtual service provider do?

The Bill contains transitional provisions for existing service providers who are operating in Hong Kong prior to 1 March 2023.

1.       Existing providers can continue to provide VA services for up to 12 months i.e. until 29 February 2024 (the first 12 months) without being licensed.

2.       An existing provider that has been providing VA services in Hong Kong prior to 1 March 2023 and that wishes to continue to provide VA services after the first 12 months must make an application to the Commission for a licence not later than 30 November 2023. The applicant will be deemed licensed, and so will be able to continue providing VA services, until (i) the service provider’s application is withdrawn, (ii) the Commission refuses the service provider’s application, or (iii) the Commission grants a licence to the service provider.

3.       If an existing provider withdraws its application or the Commission refuses its application, it has a period of 3 months to close down its provision of VA services in Hong Kong. During this period, the provider is only permitted to do acts solely for the purpose of closing down its VA services.

Similar transitional provisions apply in respect of individuals who are proposed as responsible officers or licensed representatives.

Takeaway

It is important for virtual asset firms to assess whether they fall within the regulatory remit of the VASP licensing regime. In particular, NFT marketplaces should assess carefully whether their activities fall within the scope of the licensing obligation. VA Exchange also should monitor the rules and guidelines to be published by the Commission in relation to the regime from time to time. Practically, it might not be easy to find the right persons to be the ROs of a VASP given that there seems to be a shortage of ROs already in the market and also the persons will need to have some idea on what a virtual asset is and the business of this new and fluid financial and investment medium.

 

 

For enquiries, please feel free to contact us at:

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2022