The regulatory perimeter continues to expand as the Securities and Futures Commission introduces a comprehensive regime to regulate virtual asset service providers.

By Simon Hawkins and Adrian Fong

In December 2022, Hong Kong passed the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (Amendment Bill), which will establish a new licensing regime and statutory framework for virtual asset service providers from 1 June 2023. Initially, the Amendment Bill will apply to anyone operating a centralised virtual asset trading platform in Hong Kong or actively marketing such services to the Hong Kong public.

The Securities and Futures Commission (SFC) initiated a consultation process from February to March 2023 to receive comments on its proposed regulatory framework to govern virtual asset trading platforms (VATPs). Following a consultation process, on 23 May 2023, the SFC published its Consultation Conclusions on the Proposed Regulatory Requirements for Virtual Asset Trading Platform Operators Licensed by the Securities and Futures Commission.

The finalized rules set out a comprehensive framework covering, among others, trading, custody, AML/CFT, corporate governance, compensation arrangements, and internal controls that VATPs must implement. The framework reflects the SFC’s proposed balance between investor protection and market development, following continued fallout from the collapse of well-known crypto firms globally and the Hong Kong government’s policy stance to support the development of virtual assets. Particularly important to the industry is that the retail public will be allowed access to crypto trading, albeit with certain limitations around the types of tokens the public can trade and stringent investor protection measures. Although the industry sought to relax certain proposals which were seen as potentially onerous (e.g., around token listing, custody, and proprietary trading), the SFC largely held firm to its original position but left itself some flexibility to consider alternate arrangements on a case-by-case basis.

VATPs operating in Hong Kong or marketing to the Hong Kong public will need to carefully consider whether they want to comply with the requirements, or else ensure they do not trigger the licensing obligation. Obtaining a licence from the SFC and being subject to its ongoing supervision may provide clients with much-needed reassurance that the VATP has implemented proper governance and controls, which is especially pertinent in light of recent market events. However, compliance will require intensive preparation and investment cost to set up a trading platform capable of meeting the requirements, as well as hiring and training the right management and staff who will satisfy the competence requirements and who will understand their responsibilities under the regime.

Other virtual asset activities in Hong Kong remain largely unregulated. That said, as the regulatory perimeter continues to expand, now is the right time for crypto firms and intermediaries to assess their virtual asset activities in Hong Kong and consider their path forward.

This Client Alert reviews key obligations and requirements which the new regime will impose on VATPs. The Client Alert also discusses next steps for those considering whether to apply for a licence and assesses the current virtual asset legal and regulatory framework in Hong Kong.