Hong Kong Confirms New Regulatory Licensing Regime For Virtual Asset Trading | Latham & Watkins LLP
The Hong Kong government has released its widely awaited consultation findings on a new framework to regulate trading in virtual assets.
On May 21, 2021, the Hong Kong Financial Services and the Treasury Bureau (FSTB) published its conclusions of the consultation (Conclusions) on the introduction of a new regulatory framework in Hong Kong to authorize and regulate virtual asset exchange operators (VA Exchange).
New regulatory framework
The Conclusions adopt most of the proposals presented in the FSTB of November 2020 consultation document (Consultation document), as summarized in our customer alert “Hong Kong consults on new licensing regime to regulate virtual asset trading“.
In accordance with the proposals of the consultation document, the conclusions provide that:
- The operation of a VA exchange will be a regulated virtual asset activity under the Anti-Money Laundering and Counterterrorism Financing (AMLO) Ordinance and persons operating a VA exchange will need a Virtual Asset Service Provider (VASP) license from Securities and Futures. Commission (SFC).
- A VA exchange is defined as any trading platform which is operated for the purpose of enabling an offer or invitation to buy or sell a virtual asset in exchange for any money or virtual asset, and which enters into custody, control, power, or possession of, or more, any money or virtual asset at any time during its business.
- Any VA stock exchange which is already regulated as an approved company under the voluntary opt-in regime supervised by the SFC in accordance with the Securities and Futures Ordinance (SFO) (i.e. exchanges which facilitate trading in at least one virtual security asset) will be exempt from the new regime. (Further details on the opt-in diet are summarized in our blog post “Hong Kong FinTech Week: Day 1 in reviewDecentralized virtual asset exchanges and other peer-to-peer trading platforms would also not be covered by the definition of a VA exchange, provided that virtual asset transactions are made. outside of the platform and that the platform is not involved in the underlying transaction by coming into possession of any money or virtual asset at any time.
- The term “virtual asset” is broadly defined to mean a numerical representation of value which (i) is expressed as a unit of account or a store of economic value; (ii) operates (or is intended to operate) as a medium of exchange accepted by the public as payment for goods or services, or for the discharge of debt, or for investment purposes; and (iii) can be transferred, stored or exchanged electronically. Central bank digital currencies, financial assets regulated by the FSO (for example, security tokens) and stored value facilities (which are regulated by the Hong Kong Monetary Authority) are excluded from the definition of virtual assets.
- Authorized operators of VA Exchange will be subject to the anti-money laundering and terrorist financing requirements stipulated under the AMLO and other regulatory requirements. The SFC will conduct a separate consultation on these regulatory requirements prior to the start of the new regulatory regime.
- Licensed VA exchanges may initially only offer their services to “professional investors”, that is, high net worth individuals with a portfolio of at least HK $ 8 million (approximately $ 1 million). , companies with portfolios of at least HK $ 8 million or total assets of at least HK $ 40 million (approximately $ 5.16 million), or institutional investors such as licensed banks , brokers and asset managers. Retail clients (i.e. non-professional investors) cannot trade virtual assets with VA Exchanges licensed under the new regime.
The FSTB says it will continue to monitor developments and review its position as the virtual asset market in Hong Kong becomes more mature in the future, implying that the exclusion from the retail market is temporary and s ‘part of a longer-term implementation process, but without providing an indicative timetable for the expansion of the scheme to retail investors.
Notably, virtual holdings do not count in a person’s portfolio / assets for the purposes of professional investor classification in Hong Kong (as only securities and some deposits are counted in a person’s portfolio / assets) . Therefore, VA Exchange clients who only hold virtual assets and do not have securities or deposits meeting the relevant threshold may not meet the definition of a professional investor.
- Anyone who is not a VA Exchange Authorized Operator is prohibited from actively marketing, whether in Hong Kong or elsewhere, to the Hong Kong public any regulated virtual asset activity or similar activity elsewhere.
The findings refined and broadened the eligibility criteria for VA scholarships that can apply for a license. Under the original proposal, only companies incorporated in Hong Kong with a permanent establishment in Hong Kong would be considered for a VASP license. The findings expand the eligibility criteria to include companies incorporated outside Hong Kong but registered in Hong Kong under the Companies Ordinance.
In practice, this means that offshore VA stock exchanges do not need to incorporate a new Hong Kong company to apply for a VASP license. Instead, VA offshore exchanges can establish a place of business in Hong Kong with their existing offshore entity (i.e. a branch), register that entity with the Hong Kong Companies Register, and apply for a VASP license as the Hong Kong branch of the offshore company. .
Implications for market players
The new regulatory framework will impact the functioning of Hong Kong and offshore VA stock exchanges. VA exchanges should assess whether they fall within the regulatory scope of the new regulatory framework and, if they require a VASP license, monitor other SFC proposals with respect to licensing requirements.
Some issues that VA Exchanges should start to consider include:
- VA Exchanges operating in Hong Kong and currently serving retail customers should consider what steps to take for non-onboard retail customers in an orderly fashion once the new regulatory regime takes effect.
- Offshore AV stock exchanges should consider whether they fall within the territorial scope of the new regulatory framework. In particular, offshore VA exchanges should consider whether the availability of their VA exchange for Hong Kong people in their current marketing and distribution channels (for example, through a publicly accessible Hong Kong app store ) could potentially constitute active marketing of services to the Hong Kong public.
- Offshore VA exchanges that intend to actively market their services to the Hong Kong public after the entry into force of the new regulatory regime should start considering their future business structure in Hong Kong (i.e. , Operating through a newly incorporated company in Hong Kong or through a company registered in Hong Kong (branch of the offshore company).
VA Exchange customers
Since licensed VA exchanges can only provide services to professional investors, Hong Kong retail clients will in fact not be able to access the services of licensed VA exchanges once the new regulatory framework takes effect.
The findings, however, do not provide further guidance on how retail clients can trade in virtual assets or exit their virtual asset positions under the new regulatory regime. Given the scope of the new regulatory framework, it appears that retail clients could continue to trade virtual assets through (i) peer-to-peer trading platforms, which are excluded from the new regulatory regime; (ii) overseas VA exchanges, if retail clients have researched these exchanges on their own initiative without any active marketing from the exchanges (ie on a reverse solicitation basis); and / or (iii) OTC virtual asset brokerage firms that do not meet the definition of a VA exchange. Retail customers should continue to follow regulatory developments in this area.
Next steps and timeline
The FSTB will prepare an AMLO amendment bill based on the findings and aims to present the bill to the Legislative Council in the 2021-2022 legislative session (which runs from October 2021 to the recess of summer of July 2022).
At the start of the new regulatory regime (likely in 2022), market participants will have a 180-day transition period (transition period) to comply with the new requirements. Market participants should continue to monitor additional guidance regarding the transition period, as there is some ambiguity as to whether the transition period is meant to be the period in which applicants should file their application with the SFC or the period during which they must receive a license. of SFC.