Hong Kong Virtual Asset Service Providers (VASPs) are businesses that offer services related to virtual assets, such as buying, selling, storing, and transferring cryptocurrencies or digital tokens. According to a survey by the Hong Kong Blockchain Association, the number of Hong Kong residents owning cryptocurrencies increased by 75% in 2020, with Bitcoin being the most popular virtual asset. VASPs are recognized as part of the financial industry by the Hong Kong government and are regulated under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance.
Background
A new licensing regime for virtual asset service providers (VASPs) was to come into effect on 1 March 2023 under proposed amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (the AMLO) which were introduced to Hong Kong’s Legislative Council on 6 July 2022. The proposed amendments set out in the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (Amendment Bill) will also introduce a new registration regime for dealers in special metals and stones and other amendments addressing various technical issues raised by the Financial Action Task Force (FATF).
The legislative amendments were aimed at implementing the FATF requirements that virtual asset service providers are subject to the same anti-money laundering and counter-terrorist financing (AML/CTF) obligations as financial institutions and to a statutory licensing or registration regime.
On 7 December 2022, the Hong Kong Legislative Council (HK Legco) published its “Report of the Bills Committee on Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (the HK AML/CTF (Amendment) Bill 2022)” and stated its intention to postpone the commencement of the HK AML/CTF (Amendment) Bill 2022 to allow the Administration and the SFC more time “to work out the implementation details of the new regime”, including time for the SFC to conduct market and public consultation on Hong Kong Virtual Asset Service Provider (HK VASPs) regulatory requirements. The new commencement date of the HK AML/CTF Bill 2022 was decided to be 1 April 2023 rather than 1 January 2023, while the commencement date for provisions on:
The restrictions on a business providing virtual asset service;
The transitional arrangements for the licensing requirements of HK VASPs; and
“Politically Exposed Persons (PEPs), former PEPs and “beneficial owners in relation to trusts” etc”;
Accordingly, the effective date is considered to be 1 June 2023 rather than 1 March 2023.
Therefore, implementing legislation for the VASP scheme currently is in the form of the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022 (the “Ordinance”) specified that the licensing regime for virtual asset services is to come into operation on 1 June 2023.
While, existing HK VASPs may continue to operate without a VASP license for up to 12 months from the commencement date of the relevant provisions, meaning until 31 May 2024 (the HK VASP Transitional Period). In order to qualify as a deemed licensee or be granted deemed approval beyond the expiration of the HK VASP Transitional Period, an existing HK VASP must submit its license application to the Hong Kong Securities and Futures Commission (the SFC) by no later than 29 February 2024, after which their status as a deemed licensee or granting of deemed approval will continue until the earlier of
- (i) The SFC’s grant or refusal of its license; or
- (ii) The withdrawal of the license application.
Introduction
The popularity of virtual assets in Hong Kong has significantly increased over the past few years, with more and more people and businesses becoming interested in investing in cryptocurrencies and other digital tokens as well as securing Hong Kong cryptocurrency licenses. This boom is partly due to the rise in popularity of Bitcoin and other virtual currencies, as well as the increasing acceptance of blockchain technology. The Hong Kong government has been supportive of the growth of the virtual asset industry, recognizing its potential to bring economic benefits to the city. However, it also acknowledges the importance of regulation to prevent money laundering and other illegal activities.
To this end, the Hong Kong government has implemented a regulatory framework for virtual assets that requires VASPs to follow strict compliance requirements, including the need to obtain a license from the Securities and Futures Commission (SFC) before offering virtual asset services in Hong Kong. The SFC also regularly monitors VASPs to ensure they are following the regulations and complying with the anti-money laundering and counter-terrorist financing requirements. In summary, Hong Kong VASPs are businesses that provide virtual asset-related services and are regulated under the AMLO. The increasing popularity of virtual assets in Hong Kong, with 70% of Hong Kong residents expressing interest in investing in virtual assets, has led to a boom in the industry, and the government is supportive of its growth while also regulating it to prevent illegal activities.
Imishore Consultants is an international consulting firm that assists clients all over the globe with the process of obtaining cryptocurrency licenses like the Hong Kong VASP license. Our main goal is to support you throughout the licensing process so that you can channel your energy onto other important aspects of your business. Our comprehensive service package includes everything you need to get your virtual exchange started in Hong Kong, like registration of a domestic entity in Hong Kong, provision of a company secretary, registered legal address, nominee director service, corporate bank account opening as well as assistance under our regulatory compliance consulting services to ensure continuous compliance with the legal obligations. Our team of experts for obtaining offshore financial licenses has outlined the key takeaways from the newly introduced Hong Kong VASP License regime for VA exchanges.
Why do you need a Hong Kong VASP license?
In Hong Kong, a VASP (Virtual Asset Service Provider) license is required for entities engaged in virtual asset-related activities. The licensing regime for VASPs was introduced by the Securities and Futures Commission (SFC) of Hong Kong in order to regulate and supervise virtual asset trading platforms and other virtual asset-related services.
Presently, the definition of “providing a VA service” is limited to operating a VA exchange, although the Secretary for Financial Services and the Treasury have the authority to modify this definition. Operators of virtual assets exchanges in Hong Kong must obtain a license or cease their operations within the city. The Amendment Bill includes transitional provisions for those who were conducting business in Hong Kong prior to March 1, 2023. Further, once the new regulations come into effect, overseas VA exchanges will be prohibited from actively promoting their services in Hong Kong.
Here are some reasons why obtaining a VASP license in Hong Kong is necessary:
Regulatory Compliance: Operating as a VASP without a license is a breach of regulatory requirements in Hong Kong. By obtaining a VASP license, entities demonstrate their commitment to complying with the legal and regulatory framework set forth by the SFC. It helps ensure that virtual asset activities are conducted in a regulated and supervised environment.
Legitimacy and Trust: Holding a VASP license enhances the legitimacy and trustworthiness of an entity engaged in virtual asset services. It signals to customers, investors, and other market participants that the entity operates within the regulatory framework and is subject to oversight by the SFC.
Investor Protection: The licensing regime for VASPs aims to protect investors and promote market integrity in the virtual asset space. By obtaining a VASP license, entities commit to implementing measures to safeguard investor interests, such as customer due diligence, anti-money laundering (AML) and counter-terrorist financing (CTF) controls, and proper handling of client assets.
Access to the Hong Kong Market: Hong Kong is a major international financial center and has a significant presence in the virtual asset industry. By obtaining a VASP license, entities can access the Hong Kong market and offer virtual asset services to customers in the region. This provides opportunities for business growth and expansion.
Collaboration with Financial Institutions: Licensed VASPs in Hong Kong may have an easier time establishing partnerships and collaborations with traditional financial institutions, such as banks. Financial institutions often prefer to work with licensed entities that have undergone regulatory scrutiny and compliance checks, which can facilitate banking relationships and other financial services.
Compliance with International Standards: Obtaining a VASP license in Hong Kong aligns with international efforts to regulate and supervise virtual asset activities. It demonstrates compliance with global AML and CTF standards, which may be essential for interacting with international partners, investors, or customers.
It’s important to note that the specific requirements and obligations for obtaining and maintaining a VASP license in Hong Kong may vary. Entities seeking a VASP license should carefully review the licensing requirements, undergo the necessary application process, and ensure ongoing compliance with regulatory obligations to operate legally and responsibly in the virtual asset industry.
Legal provisions
VASP Definition: The AMLO defines VASPs as entities that provide services for the exchange, trading, dealing, or holding of virtual assets, including virtual asset trading platforms, virtual asset custodian services, and virtual asset portfolio management.
Licensing Requirement: VASPs operating in Hong Kong must obtain a license from the Securities and Futures Commission (SFC) to provide regulated virtual asset services. It is an offense to provide such services without a license.
Fit and Proper Requirements: The SFC evaluates the fitness and propriety of individuals responsible for managing and operating the VASP. This assessment includes factors like competence, integrity, financial soundness, and track record.
Regulatory Obligations: Licensed VASPs are subject to various regulatory obligations, including risk assessment, customer due diligence (CDD), record-keeping, ongoing monitoring, reporting of suspicious transactions, and implementing robust anti-money laundering (AML) and counter-terrorist financing (CTF) measures.
Customer Due Diligence (CDD): VASPs must conduct thorough CDD measures, including identifying and verifying the identity of their customers, assessing the nature and purpose of the business relationship, and conducting ongoing monitoring of customer transactions.
Record-Keeping: Licensed VASPs are required to maintain records of customer transactions, CDD information, and other relevant documents. These records must be retained for a specified period and made available to regulatory authorities upon request.
Reporting Obligations: VASPs have an obligation to report suspicious transactions to the Joint Financial Intelligence Unit (JFIU) if there are reasonable grounds to suspect money laundering or terrorist financing activities.
Compliance and Internal Controls: VASPs must establish and maintain effective internal control systems, policies, and procedures to ensure compliance with regulatory requirements. This includes risk management, staff training, and independent audits.
Supervision and Enforcement: The SFC has the authority to supervise, inspect, and investigate licensed VASPs to ensure compliance with regulatory obligations. Non-compliance can result in regulatory actions, penalties, or license revocation.
International Cooperation: The AMLO promotes international cooperation in combating money laundering and terrorist financing. VASPs are expected to cooperate with regulatory authorities and provide assistance in cross-border investigations or exchange of information.
Scope of Virtual Assets: According to the proposed definition, virtual assets will refer to digital representations of value that are secured cryptographically and can be electronically traded, transferred, or stored. These assets can either be a store of economic value or expressed as a unit of account. They may also serve as a medium of exchange, a mode of payment for goods and services, a discharge of debt, or an investment. Additionally, these assets may provide the right to access or vote on the management or governance of the affairs associated with digital representations of value or any changes to their terms. The scope of the definition includes altcoins, Bitcoin, and stablecoins regardless of their underlying assets, while governance tokens and NFTs may also be covered. However, the definition excludes fiat currency digital representations, financial assets regulated under the SFO, limited-purpose digital tokens such as air miles and customer loyalty programs, and stored-value facilities.
VA Exchanges: Operating a virtual asset (VA) exchange will be considered as providing VA services through electronic facilities under the following conditions:
- a. Regular offers to sell or purchase virtual assets are made or accepted, resulting in a binding transaction.
- b. Persons are regularly introduced or identified to negotiate or conclude sales or purchases of virtual assets, or there is a reasonable expectation of such negotiations or conclusions.
- c. The person providing the service has direct or indirect possession of client money or client virtual assets.
Eligibility criteria for obtaining a Hong Kong VASP license: Hong Kong-incorporated companies that have a permanent establishment within Hong Kong, along with companies not based in Hong Kong but registered under the Companies Ordinance (Cap. 622), are eligible to apply for licenses as Virtual Asset Service Providers (VASPs). However, entities that lack a separate legal entity status, such as partnerships and sole traders, as well as individuals and overseas companies not registered in Hong Kong, are not eligible to obtain VASP licenses.
Functional requirements: Applicants seeking a license as a Virtual Asset Service Provider (VASP), along with their responsible officers, licensed representatives, directors, and ultimate owners, are required to successfully pass the fit and proper test, as outlined in the Fit and Proper Guidelines published by the Securities and Futures Commission (SFC). The VASP applicant must appoint a minimum of two responsible officers who will bear the responsibility of overseeing the licensed VASP’s operations and ensuring compliance with relevant legislation and regulatory obligations. The requirements for responsible officers of VASPs align with those applicable to responsible officers of licensed corporations under the Securities and Futures Ordinance (SFO) and entail the following:
- At least one responsible officer must hold the position of executive director within the VASP applicant.
- If the VASP applicant has multiple executive directors, all of them must be appointed as responsible officers.
- At least one responsible officer must be a permanent resident of Hong Kong.
- At least one responsible officer must be available at all times to supervise the VASP’s business operations.
Other eligibility requirements: As stated in the Legislative Council Brief issued by the Financial Services and the Treasury Bureau (FSTB), applicants seeking licensing as Virtual Asset Service Providers (VASPs) must adhere to a comprehensive set of regulatory requirements imposed as licensing conditions by the Securities and Futures Commission (SFC). The focus of these requirements is to safeguard investor interests and encompasses the following aspects:
Evaluation of the company and management structure of VASP licensing applicants.
Verification of a robust and viable business model, including the implementation of detailed risk management policies and measures to prevent listing and counter-market manipulation.
VASP licensing applicants must demonstrate sufficient financial resources, although a specific minimum amount has not yet been specified.
During the initial phase of the licensing regime (duration unspecified), licensed VASPs are restricted to offering services exclusively to professional investors. This provision allows the SFC the flexibility to make necessary adjustments without the requirement of amending the existing legislation.
Penalty and enforcement actions: Engaging in the operation of a Virtual Asset (VA) exchange in Hong Kong without obtaining a proper license, or actively promoting the services of an overseas VA exchange that is not licensed in Hong Kong to the general public of Hong Kong, without a reasonable justification, will be considered an offense. Conviction on indictment for such offenses may result in a fine of HK$5 million and imprisonment for a period of seven years. In the case of a continuing offense, an additional fine of HK$100,000 may be imposed for each day during which the offense persists. For summary convictions, fines of up to HK$500,000 and imprisonment for up to two years may be imposed, along with a further fine of HK$10,000 for each day the offense continues.
Conclusion
Obtaining a VASP license in Hong Kong is a meticulous process that requires comprehensive compliance with regulatory requirements. As a trusted business consulting firm, Imishore Consultants provide a range of services to assist you throughout this journey. From conducting an initial assessment of your eligibility to guiding you through the steps to register company in Hong Kong, appointing responsible officers, and developing robust AML/CFT policies and controls, our expertise ensures that you meet the necessary standards before obtaining a Hong Kong cryptocurrency license.
Additionally, we offer support in implementing reliable AML/CFT solutions to streamline your compliance procedures, leveraging services to enhance efficiency and effectiveness. With our assistance, you can confidently navigate the application process, submit a well-prepared application, and maintain compliance with AML/CTF regulations even after obtaining the Hong Kong VASP license. Our commitment to excellence and industry best practices empowers you to establish a strong foundation for your VASP operations while safeguarding against money laundering and terrorist financing risks.
How can Imishore Consultants assist with Hong Kong VASP License?
- Initial Assessment
- Register company in Hong Kong
- Appointing Responsible Officers
- Developing AML/CFT Policies, Procedures, and Controls
- Implementing AML/CFT Systems
- Adoption of reliable AML/CFT solution
- Hong Kong VASP license application submission and support
- Compliance monitoring and maintenance
Contact us to know more about how to apply for a Hong Kong VASP License under the new regime and Imishore’s lawyers will revert within the next 24 hours.
