On 7 December 2022, the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (Amended AMLO) was passed by the LegCo. The amendments impose statutory AML/CTF obligations on virtual asset service providers (VASPs) and introduce a VASP licensing regime. LegCo also published a report (LC Paper No. CB(1)855/2022) to provide clarifications on certain concepts under the Amended AMLO and explain the postponed timeline for the commencement of the licensing regime for VASPs.

Clarification of key concepts

Definition of "VA" and "VA service"

"VA" in the Amended AMLO means a cryptographically secured digital representation of value expressed as a unit of account or a store of economic value, that either (i) is used for payment of goods and services, discharge of debt and/or investment, or (ii) provides voting rights on affairs connected with any cryptographically secured digital representation of value. As such, VA would cover a wide range of cryptocurrencies such as Bitcoin, Ether and stablecoins, while most NFT will not fall into the VA definition at this stage.

"VA service" on the other hand seeks to capture automated trading services provided by centralised VA exchanges. The VASP licensing regime requires that any person seeking to operate a VA exchange in Hong Kong should apply for a licence from the SFC.

Licensing criteria for VASPs

A VASP licence would only be granted to a VASP with a Hong Kong nexus (being a locally incorporated company with a permanent place of business in Hong Kong or a registered non-Hong Kong company). The applicant should satisfy the relevant regulatory requirements on investor protection including having adequate financial resources, knowledge, experience and risk management policies.

The applicant should also have at least two responsible officers (ROs) who are to assume general responsibility for overseeing the operation of the licensed VASP, while any person who may carry out regulated functions in relation to the business of providing a VA service must apply to be a licensed representative (LR). The ROs and LRs must be fit and proper with regard to factors like their financial status/solvency, education, experience, reputation, character, reliability and financial integrity.

At the initial stage, a licensing condition that the VA services can only be provided to professional investors (PI) will be imposed, but the SFC will conduct a further consultation to explore the possibility of allowing non-PIs to conduct transactions within licensed VA exchanges provided that additional investor protection measures are in place.

Regulation of overseas VA exchanges

The Amended AMLO contains provisions prohibiting the provision of VA services in Hong Kong (including the active marketing of VA services by overseas VA exchanges to the Hong Kong public) without a valid VASP licence. Such provisions will be interpreted in a similar manner to the comparable restrictions under the Securities and Futures Ordinance (SFO).

AML obligations of VASP licensees

Licensed VASPs will be required to comply with requirements on customer due diligence and record-keeping similar to traditional financial institutions. Licensed VASPs and their wholly owned subsidiaries also need to regularly submit audited accounts and financial information to the SFC. The SFC will be empowered to enter business premises to conduct inspections and investigations as needed.

Updated timeline

The commencement of the Amended AMLO and VASP licensing regime is postponed as follows –

The SFC will carry out a further consultation on the detailed regulatory requirements of the new licensing regime, including exploring the easing of the PI-only requirement and relevant investor protection measures.

The clarifications and updated timeline will help enhance market awareness and provide momentum to this exciting development in Hong Kong's VA ecosystem.

Authors: Rocky Mui, Winni Choi, Michelle Ko