Hong Kong to introduce new mandatory licensing regime to regulate virtual asset exchanges

On 21 May 2021, the Hong Kong Financial Services and the Treasury Bureau (FSTB) published its consultation conclusions on the introduction of a new mandatory licensing regime under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) for virtual asset (VA) exchange operators. This feeds into initiatives we are seeing across the network as regulators take steps to bring virtual assets into the regulatory net. For the most part, the consultation conclusions did not spring any surprises and largely adopt the proposals set out in the consultation paper published by the FSTB in November 2020.

As background, the current licensing regime for virtual asset trading platforms is voluntary and only eligible if clients are able to trade at least one VA that is a “security” on the platform, which then allows the platform to be regulated by the Securities and Futures Commission (SFC). Once licensed, all of the virtual asset trading platform’s business (including trading of security VAs and non-security VAs) would be regulated by the SFC. However, under the new mandatory licensing regime, all Hong Kong-based VA exchanges (and overseas VA exchanges that “actively market” to Hong Kong investors) would be required to be licensed, regardless of whether they enable their clients to trade in security VAs and/or non-security VAs.

In light of the consultation conclusions, VA exchanges (including offshore VA exchanges) should assess whether they are caught by the new mandatory licensing regime, and if so, begin considering whether they can satisfy the anti-money laundering and counter-terrorist financing (AML/CTF) and other regulatory requirements to obtain a Virtual Asset Services Provider licence, including the requirement that they may only offer their VA exchange services in Hong Kong to professional investors. VA exchanges should also keep an eye out for the further SFC consultation regarding the detailed regulatory requirements and may wish to respond to any such consultation.

In terms of next steps, the FSTB will prepare an amendment bill to the AMLO based on the consultation conclusions with a target to introduce the amendment bill into the Legislative Council in the 2021-2022 legislative session (based on current scheduling, we expect that to be later in 2021). Upon commencement of the new mandatory licensing regime, VA exchanges will have a 180-day transitional period to obtain a licence from the SFC. The SFC will separately consult on the detailed regulatory requirements that will apply to licensed VA exchanges prior to the commencement of the new mandatory licensing regime to provide more guidance for the industry on the regulatory expectations.

We have summarised in a table the key aspects of the new mandatory licensing regime.