Hong Kong to licence VASPs and regulate market conduct
After a public consultation completed last year, the Hong Kong Government has gazetted draft legislation which is expected to implement a new licensing regime for Virtual Asset Service Providers (VASPs). The draft bill promises a comprehensive package of reforms which are also targeted at addressing specific concerns around investor protection, marketing by offshore exchanges and market conduct in trading of digital assets.
The bill seeks to establish a licensing regime for Hong Kong VASPs and gives the Hong Kong Securities and Futures Commission broad oversight of their operations. The bill requires VASPs to incorporate or register in Hong Kong and imposes a fit and proper person test for licensees and responsible officers. It will also impose significant penalties for carrying on unlicensed activity and seeks to restrict marketing to the Hong Kong public by unlicensed persons or offshore exchanges.
The bill outlines a range of licensing conditions for VASPs many of which will be familiar to financial services licensees. Notably, it is also anticipated that the SFC will impose a licensing condition on VASPs which restricts them, at least initially, to servicing professional investors only. The bill also requires VASPs to comply with existing AML/CTF requirements in relation to customer due diligence and record keeping.
The broad scope of the bill is underlined by proposed new offences which address fraudulent or misleading conduct and market manipulation. The bill would prohibit fraudulent or reckless misrepresentations with the intention of inducing another to invest in Virtual Assets and the use of fraudulent or deceptive acts in transacting in Virtual Assets. The latter offence may be used to target insider trading and market manipulation occurring on or off exchanges.
The bill is stipulated to take effect on 1 March 2023, subject to legislative approval. There are transitional provisions for existing providers of Virtual Asset services.
The Hong Kong bill represents the latest attempt by Governments and regulators to establish more comprehensive regimes regulating cryptocurrency firms and markets. It will be interesting to monitor if certain proposals outlined in the Hong Kong bill are pursued elsewhere as regulators around the globe contemplate their own legislative reforms.