Clifford Chance

The Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (Amended AMLO) was passed by the Legislative Council of the Hong Kong Special Administrative Region (LegCo) on 7 December 2022.

In this article we explore the key concepts under the Amended AMLO and outline the amended extended timeline for commencement of the licensing regime for VASPs.

The Amended AMLO introduces statutory AML/CTF obligations on virtual asset service providers (VASPs) and establishes a VASP licensing regime.

LegCo also published a report to provide clarification 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. Most NFTs would not fall within this definition.

"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 can only be granted to a VASP with a Hong Kong connection (either 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 of 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 including their financial status/solvency, education, experience, reputation, character, reliability and financial integrity.

That the VA services can only be provided to professional investors (PI) will be imposed as a licensing condition at the initial stage, but the Securities and Futures Commission (SFC) will conduct 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 restrictions on 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 Hong Kong 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

• 1 April 2023 (previously 1 January 2023): Commencement date of the Amended AMLO: (Effective date for criminal offences for fraudulent or reckless misrepresentations, or employing deceptive or fraudulent devices, schemes or acts, in relation to VA transactions)
• 1 June 2023 (previously 1 March 2023): Commencement date of the VASP licensing regime
• 1 June 2023 (previously 1 March 2023): Start date for the 12-month transitional period for an existing Hong Kong VASP before the commencement of the licensing regime, allowing it to continue to provide VA services without a VASP licence.
• By no later than 1 March 2024 (previously 1 December 2023): Deadline of the 9-month period for existing VASPs to file an application to the SFC for a licence in order to be deemed licensed from the day after the expiry of the transitional period (until the SFC has made a decision to either approve or reject their licence application).

Next Steps

The SFC will carry out 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.