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Hong Kong’s new licensing regime for centralised virtual asset trading platforms (VATPs) under the AMLO (Anti-Money Laundering and Counter-Terrorist Financing Ordinance) took effect on 1 June 2023. Under the new regime, all VATPs carrying on a business of operating a virtual asset exchange in Hong Kong or actively marketing their services to Hong Kong investors will need to be licensed by the SFC (Securities and Futures Commission). More than 80 firms have reportedly expressed an interest in applying for a licence in Hong Kong, including Huobi, OKX, Amber Group and Bybit. Under recently finalized rules, crypto firms with SFC licences will be able to offer trading services to retail investors, provided it is in large market cap cryptocurrencies that feature in at least two acceptable, investible indexes from independent providers.
The rules also cover investor protection measures, customer onboarding, governance, disclosure, token due diligence and admission, segregation of client assets, avoidance of conflicts of interest, cybersecurity standards, financial resources, auditing and accounting – among other areas. VATPs will not be allowed to engage in proprietary trading or market making activities. Transitional arrangements The SFC issued a circular setting out the transitional arrangements of the new licensing regime, applicable to VATPs providing trading services in non-security tokens.
The transitional arrangements aim to provide “reasonably sufficient time” for VATPs which are already providing VA services in Hong Kong prior to 1 June 2023, and which are “prepared to comply” with the SFC’s standards. Under the transitional arrangements, VATPs which are providing a VA service with “meaningful and substantial presence” in Hong Kong before 1 June 2023 may continue to provide the service for 12 months (until 31 May 2024), without being in breach of the new licensing requirements. To determine whether a VATP has a “meaningful and substantial presence” in Hong Kong, the SFC will consider whether their incorporation, physical office, key personnel and trading volume is in Hong Kong, among other criteria. “The mere setting up of a company in Hong Kong or only having ‘shell’ operations in Hong Kong would not suffice.
Individuals may also perform a regulated function in Hong Kong for pre-existing VATPs until 31 May 2024 without being in breach of the licensing requirements. VATPs which were not operating in Hong Kong before 1 June 2023 are not eligible for the transitional arrangements, and thus may not commence any VATP business activities in the city or actively market to Hong Kong investors until they are licensed by the SFC.
Deeming arrangement The SFC said pre-existing VATP may qualify for a “deeming arrangement” under the AMLO, which means they would be deemed to be licensed from 1 June 2024 to provide VA services pending a final determination on their applications, if they can meet the certain deeming conditions.
The conditions include requirements that the VATP application is fully completed and submitted online via the SFC’s WINGS platform by 29 February 2024, and that arrangements are in place to ensure compliance with regulatory requirements.
A licensed individual who applies to be a licensed representative and/or responsible officer of a pre-existing VATP may also be qualified for the deeming arrangement, subject to certain conditions being met.
The circular highlights the need for applications to be complete, and submitted early, in order to make it possible for firms to qualify for the deeming arrangement. Generally, applicants will be provided an opportunity to resolve issues with their applications. However, this approach “may not be practically feasible for applications submitted close to the 29 February 2024 deadline. Where an application is submitted past the deadline of 29 February 2024 due to the time needed in resolving the fundamental issue, the application would not qualify for the deeming arrangement.”
Dual licence The circular also covers VATPs which intend to provide trading services in security tokens, saying they will be subject to Hong Kong’s securities laws and should commence such business only after obtaining the relevant licence under the SFO (Securities and Futures Ordinance).
The SFC notes that the terms and features of virtual assets may evolve over time, and as such its classification may change from a non-security token to a security token, or vice versa.
To avoid contravening any of the licensing regimes and ensure business continuity, VATPs (together with their proposed licensed representatives and responsible officers) should apply for approvals under both the SFO and the AMLO and become “dually-licensed”.
This means pre-existing VATPs should also submit licence applications to carry out Types 1 (Dealing in securities) and Type 7 (Providing automated trading services) regulated activities under the SFO, together with a licence application to provide VA services under the AMLO.
The SFC said it has streamlined the application process to allow applications under both regimes to be submitted using a “single consolidated application online”.
Additional guidance Resources to assist licence applicants and provide guidance on the new regulatory requirements are listed here, including a VATP Licensing Handbook and forms for notifications and regulatory filings.
Whatsapp : (852) 6499 4686 Phone : (852) 2186 6936 Email : info@intershores.hk
Disclaimer: Whilst reasonable care has been taken in provision of information above, it does not constitute legal or other professional advice. INTERSHORES does not accept any responsibility, legal or otherwise, for any error omission and accepts no responsibility for any financial or other loss or damage that may result from its use. In particular, readers are advised to take appropriate professional advice before committing themselves to any involvement in jurisdictions, vehicles or practice.
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