Hong Kong's legislature has approved a new licensing regime for virtual asset service providers (VASPs) which is set to enter into force on 1 June 2023.
The legislation will subject VASPs to the same anti-money laundering obligations imposed on major financial institutions and impose additional compliance and consumer protection obligations. As of June next year, VASPs will need to comply with these provisions before being granted a licence to operate in Hong Kong.
The passage of the bill signals Hong Kong's commitment to regain Asia's crypto crown. It follows the issuance of a major policy statement in October addressing the city's efforts to establish a sound regulatory regime for VASPs and promote digital assets innovation including in the areas of stablecoins, CBDCs and asset tokenisation.
Key obligations under the new licensing regime include:
Any person engaging in the virtual asset exchange business is required to apply for a licence from the Securities and Futures Commission (SFC);
Relevant persons must satisfy the fit and proper test and comply with anti-money laundering and counter-terrorist financing requirements (including requirements on customer due diligence and record keeping), as well as other regulatory requirements on investor protection (such as safe custody of client assets, financial soundness and avoiding conflicts of interest);
Licensed virtual asset exchanges and their wholly owned subsidiaries need to regularly submit audited accounts and financial information to the SFC.
The SFC is also empowered to enter business premises for conducting inspections and investigations when necessary.
The regime includes transitional provisions which will allow existing cryptocurrency exchanges to continue to operate pending the outcome of a licensing application. Certain market integrity offences under the bill will also commence prior to the licensing regime on 1 April 2023.
The SFC is expected to carry out further consultations on aspects of the regime over the next six months, including retail access to cryptocurrency markets.
In the aftermath of FTX's collapse, governments and regulators around the world appear to be stepping up their efforts to put in place effective protections for retail cryptocurrency investors. Despite FTX's collapse, Hong Kong’s Financial Secretary Paul Chan reiterated the city’s commitment to becoming a virtual asset hub in a blog post on 13 November, two days after FTX filed for US Chapter 11 bankruptcy.
Hong Kong once wore the crypto crown in Asia, being the home of many global exchanges' headquarters or regional offices. According to Chainanlysis, Hong Kong received about US$74bn in terms of value of crypto assets received last financial year, trailing the $100bn received by Singapore. lt remains to be seen whether Hong Kong's latest move can help it regain its status as Asia's leading hub for digital assets.