Hong Kong Introduces Licensing Regime for Digital Asset Companies Suppliers

June 30, 2022

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On June 24, 2022, the Hong Kong Authorities gazetted the Anti-Cash Laundering and Counter-Terrorist Financing (Modification) Invoice 2022 (“Modification Invoice”)[1]. The Modification Invoice introduces adjustments to the Anti-Cash Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (“AMLO”)[2], together with the introduction of a licensing regime for digital asset providers suppliers (“VASPs”) and imposing statutory anti-money laundering and counter-terrorist financing (“AML/CTF”) obligations on VASPs in Hong Kong. A Legislative Council Transient on the Modification Invoice (“LegCo Transient”)[3] was additionally printed on the identical date, which offers invaluable context for its introduction. The Modification Invoice follows the Session Conclusions[4] on this topic printed by the Hong Kong authorities’s Monetary Companies and Treasury Bureau on Might 21, 2021, as mentioned in our earlier alert.[5]

As famous by the LegCo Transient, the Hong Kong authorities considers its proposed VASP regime to be ‘extra rigorous and complete’ than the AML targeted VASP regimes launched in Singapore, the UK and Japan. To this finish, and as mentioned additional beneath, the VASP regime is targeted not solely on AML associated issues however on guaranteeing ample investor safety for digital asset traders. As such, the VASP regime as soon as applied won’t solely impose a rigorous licensing regime on VASP operators, however will even criminalise a broad vary of crypto-related misconduct, no matter whether or not it takes place on a licensed VASP alternate. The regime additionally offers the SFC with an in depth vary of supervisory powers.

I. Scope of proposed licensing regime for VASPs

As foreshadowed by the Session Conclusions final yr, the Modification Invoice introduces a licensing regime for VASPs which offers that the enterprise of working a digital asset (“VA”) service is a “regulated operate” requiring a license when undertaken in Hong Kong.[6]

The Modification Invoice defines “VA service” as solely together with the operation of a VA alternate,[7] which is outlined as the supply of providers by way of technique of digital amenities whereby:

  • gives to promote or buy VAs are frequently made or accepted in a manner that types or ends in a binding transaction; or
  • individuals are frequently launched, or recognized to different individuals so that they might negotiate or conclude, or with the cheap expectation that they may negotiate or conclude gross sales or purchases of VAs in a manner that types or ends in a binding transaction; and
  • the place consumer cash or consumer VAs comes into direct or oblique possession of the particular person offering such a service.

Whereas the scope of providers coated by this definition is relatively slim compared to different crypto licensing regimes such because the Singapore Fee Companies Act, we anticipate that this class of “VA service” could also be expanded sooner or later to increase the VASP regime to different crypto-asset actions. That is significantly probably on condition that the Modification Invoice offers that the modification of this definition would not require legislative change, however might as a substitute be achieved by the publication of a discover within the Authorities Gazette by the Secretary for Monetary Companies and the Treasury.[8]

Additional, we word that the above definition included within the Modification Invoice is broader than the definition proposed beneath the Session Conclusions, which contemplated licensing ‘any buying and selling platform which is operated for the aim of permitting an invite to be made to purchase or promote any VA in alternate for any cash or any VA and which comes into custody, management, energy or possession of, or over, any cash or any VA at any time throughout the course of its enterprise.’ As famous above, the Modification Invoice’s definition of “VA service” now additionally captures digital amenities by way of which ‘individuals are frequently launched, or recognized to different individuals so that they might negotiate or conclude, or with the cheap expectation that they may negotiate or conclude gross sales or purchases of VAs in a manner that types or ends in a binding transaction’. That is significantly important to operators of peer-to-peer exchanges, on condition that this definition seems to seize at the very least some peer-to-peer platforms the place these platforms represent amenities by way of which events are frequently launched for the aim of, or with the cheap expectation of, negotiating or concluding gross sales of VAs. That is in distinction to the Session Conclusions’ assertion that peer-to-peer buying and selling platforms that solely present a discussion board the place consumers and sellers of VAs can submit their bids and gives “with or with out computerized matching mechanisms” will not be coated beneath the definition of “VA alternate”. As such, will probably be necessary for operators of peer-to-peer exchanges to evaluate their Hong Kong actions and thoroughly think about whether or not they do fall inside this extra limb of “VA alternate” as included within the Modification Invoice. We anticipate that it additionally could also be needed to hunt additional steering from the SFC relating to their place on peer-to-peer platforms as a part of the session course of which is predicted to happen relating to the SFC’s detailed regulatory necessities for the VASP regime. This session course of is predicted to happen throughout Q3-This fall 2022 as soon as the Modification Invoice has been enacted and previous to the brand new regime taking impact.

The Modification Invoice has outlined a “VA” as a digital illustration of worth that:

  • is expressed as a unit of account or a retailer of financial worth;
  • both:
    • features (or is meant to operate) as a medium of alternate accepted by the general public as cost for items or providers or for the discharge of debt, or for funding functions; or
    • offers rights, eligibility or entry to vote on the administration, administration or governance of the affairs in reference to any cryptographically secured digital illustration of worth; and
  • might be transferred, saved or traded electronically.[9]

Apparently, the Session Conclusions didn’t ponder the inclusion of the supply of rights, eligibility or entry to vote as a part of the definition of a “VA”. Nevertheless, this addition signifies that governance tokens will probably be thought of to be a VA. Additional, whereas not referenced by title within the Modification Invoice or Legco Transient, we think about that, according to the Session Conclusions, the definition of “VA” will seize stablecoins. Lastly, whereas the definition of a VA doesn’t presently cowl non-fungible tokens, the Modification Invoice offers that the Secretary for Monetary Companies and the Treasury could increase the classes of tokens captured by the “VA” definition by publication of a discover within the Gazette.[10]

II. Licensing necessities for licensed VASPs

With the intention to be eligible for a VASP license, the VASP license applicant have to be a domestically integrated firm with a everlasting workplace in Hong Kong or an organization integrated elsewhere however registered in Hong Kong beneath the Firms Ordinance (Cap. 622).[11]

An applicant wishing to be licensed as a VASP should reveal to the Securities and Futures Fee (“SFC”) that:

  • it’s a match and correct particular person to be licensed to supply the VA service;
  • it has at the very least 2 individuals match and correct to be accountable officers (“ROs”), every of whom are of enough authority inside the applicant and at the very least certainly one of whom have to be an government director;
  • every director of the applicant is match and correct; and
  • the last word helpful proprietor of the applicant is match and correct to be the last word helpful proprietor of a VASP licensee.[12]

The introduction of the match and correct take a look at is modelled on the match and correct necessities for the licensing of regulated actions beneath the Securities and Futures Ordinance (Cap. 571) (“SFO”).[13] Given this, it’s unsurprising that the components that the SFC will think about in evaluating the health and properness of VASP candidates and related people (e.g. ROs, administrators and supreme helpful house owners) are the identical as these components set out within the SFO in relation to licensed companies and registered establishments. These components embody whether or not the applicant has been convicted of offences referring to cash laundering / terrorist financing, fraud, corruption or dishonesty; the applicant’s monetary standing or solvency; its expertise and {qualifications}; and its popularity, reliability and integrity.[14] Due to this fact, we advocate referring to the SFC’s Match and Correct Pointers[15] to grasp the issues that the SFC will probably think about in evaluating whether or not an individual is match and correct in relation to a VASP licensee.

III. Licensing circumstances and AML/CTF necessities

The Modification Invoice offers that the SFC could impose a variety of licensing circumstances on a VASP licensee, together with, however not restricted to, necessities in relation to:

  • Monetary circumstances (e.g. capital necessities);
  • Danger administration insurance policies and procedures;
  • Anti-money laundering and counter-terrorism financing insurance policies and procedures;
  • Administration of consumer belongings;
  • Monetary reporting and disclosure;
  • Digital asset itemizing and buying and selling insurance policies;
  • Market abuse insurance policies;
  • Cybersecurity; and
  • Avoidance of conflicts of curiosity.[16]

We anticipate additional particulars relating to the character of those licensing circumstances will probably be supplied by the SFC in its forthcoming session on the detailed regulatory necessities relevant to VASPs (as referred to above). Nevertheless, it’s attention-grabbing to notice that the listing of license circumstances included within the Modification Invoice does not embody classes of purchasers to whom the VASP licensee could present providers. That is in distinction to the LegCo Transient’s assertion that, to be able to promote investor safety, the licensing regime will, on the preliminary stage, stipulate that VASPs can solely present providers to skilled traders (“PIs”) and that this restriction can be imposed by the SFC as a license situation (which is in step with the method taken by the SFC to imposing the identical restriction on sure licensed companies). We think about that using the phrase “preliminary stage” and taking this method to the imposition of the PI solely restriction (moderately than enshrining it within the laws itself) means that the SFC could presumably permit growth of VASP providers to retail traders down the monitor when VA markets change into extra mature and controlled. This may be a welcome improvement for the digital asset trade and would deliver the Hong Kong regime into line with comparable regimes globally, together with the Singapore regime.

The Modification Invoice additionally offers that licensed VASPs should adjust to the AMLO’s necessities similar to buyer due diligence and report conserving necessities (e.g. Schedule 2 of the AMLO).[17]

IV. Key offences beneath the brand new VASP regime

The Modification Invoice additionally creates a major new enforcement regime relevant to these offering VA providers in Hong Kong or to the Hong Kong public. Specifically, the Modification Invoice proposes that carrying on a enterprise of offering a VA service with no license can be an offence punishable on conviction on indictment to a wonderful of HK$5 million and seven years imprisonment, and within the case of a unbroken offence, an extra wonderful of HK$100,000 for daily throughout which the offence continues.

The Modification Invoice additionally introduces the next vary of different offences punishable by important fines and/or imprisonment:

  • the offence of energetic advertising and marketing of a VA service by unlicensed individuals, whether or not in Hong Kong or elsewhere, to the general public of Hong Kong. This offence particularly is more likely to have a major affect on crypto exchanges based mostly exterior of Hong Kong and with no Hong Kong presence “on the bottom” however which market their providers to the Hong Kong public, together with by way of, for instance, Chinese language language promoting;[18]
  • the offence of creating false or deceptive statements in reference to an software for the grant of a license;
  • the offence of creating fraudulent or reckless misrepresentations with the intention to induce others to spend money on VAs; and
  • the offence of using any misleading or fraudulent gadget, scheme or act, instantly or not directly, in a transaction involving VA. We anticipate that this offence particularly can have a broad remit, on condition that it seems more likely to prolong to market manipulation and/or insider dealing in relation to digital belongings on the idea that such actions contain fraudulent and/or misleading conduct.

Importantly, the offences of creating fraudulent or reckless misrepresentations or using misleading or fraudulent units, schemes or acts are not restricted to transactions on licensed VASPs and as such will seize all people and/or corporations partaking in any such conduct with a considerable nexus to Hong Kong.

Lastly, within the case of non-compliance with the statutory AML/CFT necessities, the licensed VASP and its ROs commit offences and upon conviction, every is liable to a wonderful of HK$1 million and a pair of years  imprisonment. Additional, licensed VASPs and ROs in contravention may face disciplinary actions, together with suspension or revocation of licenses.

V. Supervisory powers granted to the SFC over licensed VASPs

The Modification Invoice additionally offers the SFC with broad supervisory powers over licensed VASPs, these embody the ability to enter enterprise premises of the licensed VASP and its related entities for conducting routine inspections of enterprise data;[19] to request the manufacturing of paperwork and different data;[20] to analyze non-compliances and impose disciplinary sanctions towards licensed VASPs in contravention.[21]

The Modification Invoice additionally offers the SFC with a major vary of further powers in relation to licensed VASPs, together with:

  • the ability to nominate an auditor to analyze into the affairs of a licensed VASP and its related entities if it has causes to imagine that the licensed VASP, or any of its related entities, has did not adjust to provisions of the AMLO, code or guideline printed beneath AMLO, or any licensing circumstances imposed by the SFC;[22] and
  • permitting the SFC to supply help to abroad regulators in investigations of any contraventions of VA necessities exterior of Hong Kong. That is more likely to be significantly important given the worldwide remit of many crypto companies;[23] and
  • powers to impose prohibitions or restrictions on the operation of a licensed VASP in a variety of circumstances, together with the place the SFC considers the VASP not be match and correct, or the place there’s a danger of dissipation of consumer belongings.[24]

The Modification Invoice additionally offers the SFC with the ability to hunt sure orders from the Court docket of First Occasion (“CFI”) in relation to contraventions of the VASP regime, together with contraventions of the AMLO, any discover given beneath the AMLO or any circumstances of a license granted beneath the AMLO.[25] This consists of, considerably, the ability to use to the CFI for an order compelling an individual who has been, is or could change into, concerned within the fee of the aforementioned contraventions, to take any step that the CFI directs, together with to revive events to any transaction to the place by which they have been earlier than the transaction was entered into.[26] This might expose individuals who’re the topic of such orders to legal responsibility to supply important investor compensation in relation to losses suffered on account of contraventions of the AMLO. Nevertheless, the Modification Invoice notably does not give the SFC the ability to hunt such orders in relation to contraventions of codes and tips issued beneath the AMLO, in distinction to the ability being sought by the SFC at current in its present session on amendments to its energy to hunt sure orders from the CFI beneath part 213 of the SFO.

VI. Timing

The primary studying of the Modification Invoice was attributable to happen on June 29, however that first studying has now been rescheduled to July 6, 2022, with the provisions referring to the VASP regime attributable to take impact on March 1, 2023.

Whereas the Modification Invoice offers for transitional preparations for suppliers of VA providers, these transitional preparations do not prolong to the offences set out above in relation to fraudulent conduct in relation to transactions in VAs, which is able to take impact from March 1, 2023.

Whereas the Session Conclusions had contemplated a transitional interval of 180 days for suppliers of VA providers, the Modification Invoice offers that:

  • there will probably be a transitional interval for the primary 12 months for any company carrying on a enterprise of working a VA alternate in Hong Kong previous to March 1, 2023 (i.e. no matter whether or not they apply for a license); and
  • companies carrying on a enterprise of working a VA alternate in Hong Kong instantly previous to March 1, 2023 that file an software for a VA within the first 9 months (i.e. license by December 1, 2023) will probably be deemed to be licensed from the day after the expiry of the 12 month transitional interval (i.e. March 2, 2024) till the SFC has decided to both approve or reject their license software, or the license applicant withdraws their software.

As such, potential license candidates ought to make sure that they’re working in Hong Kong previous to March 1, 2023 to make sure that they’re entitled to those transitional preparations.

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   [1]   Anti-Cash Laundering and Counter-Terrorist Financing (Modification) Invoice 2022, obtainable at: https://www.gld.gov.hk/egazette/pdf/20222625/es32022262516.pdf

   [2]   Anti-Cash Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), obtainable at: https://www.elegislation.gov.hk/hk/cap615

   [3]   Legislative Council Transient Anti-Cash Laundering and Counter-Terrorist Financing (Modification) Invoice 2022 (June 22, 2022), printed by the Monetary Companies and the Treasury Bureau, obtainable at: https://www.fstb.gov.hk/fsb/en/legco/docs/AML(A)Billpercent202022_legcopercent20brief_epercent20(Difficulty).pdf

   [4]   Session Conclusions on Public Session on Legislative Proposal to Improve Anti-Cash Laundering and Counter-Terrorist Financing Regulation in Hong Kong (Might 2021), printed by the Monetary Companies and the Treasury Bureau, obtainable at: https://www.fstb.gov.hk/fsb/en/publication/seek the advice of/doc/consult_conclu_amlo_e.pdf

   [5]   Licensing Regime for Digital Asset Companies Suppliers in Hong Kong, printed by Gibson, Dunn and Crutcher (June 7, 2021), obtainable at: https://www.gibsondunn.com/licensing-regime-for-virtual-asset-services-providers-in-hong-kong/#_ftn1

   [6]   Part 53ZRD(3), Modification Invoice

   [7]   Schedule B, Modification Invoice

   [8]   Part 53ZTL, Modification Invoice

   [9]   Part 53ZRA(1), Modification Invoice

  [10]   Part 53ZRA(4)(a), Modification Invoice

  [11]   Part 53ZRK(3)(a), Modification Invoice

  [12]   Part 53ZRK(3)(b), Modification Invoice

  [13]   See Part 129(1), Securities and Futures Ordinance (Cap. 571), obtainable at: https://www.elegislation.gov.hk/hk/cap571

  [14]   Part 53ZRJ, Modification Invoice

  [15]   See SFC Match and Correct Pointers (January 2022), obtainable at https://www.sfc.hk/-/media/EN/belongings/elements/codes/files-current/internet/tips/fit-and-proper-guidelines/Match-and-Correct-Pointers.pdf

  [16]   Part 53ZRK(5), Modification Invoice

  [17]   Part 53ZRR, Half 3, Division 2, Paragraph 34, Modification Invoice

  [18]   We anticipate that the SFC will take an analogous method to “energetic advertising and marketing” on this context because it does to “energetic advertising and marketing” for the needs of part 115 of the SFO. See, e.g., the SFC’s FAQ on this subject, obtainable at: https://www.sfc.hk/en/faqs/intermediaries/licensing/Actively-markets-under-section-115-of-the-SFO#9CAC2C2643CF41458CEDA9882E56E25B

  [19]   Half 2, Division 2, Clause 11(1B), Modification Invoice

  [20]   Half 2, Division 2, Clause 11(3), Modification Invoice

  [21]   Part 53ZSO, Modification Invoice

  [22]   Part 53ZSG, Modification Invoice

  [23]   Half 2, Division 2, Clause 18(13B) and (13C), Modification Invoice

  [24]   Sections 53ZSX, 53ZSY, 53ZSZ and 53ZT, Modification Invoice

  [25]   See our earlier alert on this subject – Hong Kong SFC Consults on Important Reforms to the SFO Enforcement Provisions, printed by Gibson, Dunn and Crutcher (June 14, 2022), obtainable at: https://www.gibsondunn.com/hong-kong-sfc-consults-on-significant-reforms-to-the-sfo-enforcement-provisions/

  [26]   Part 53ZTG, Modification Invoice


The next Gibson Dunn attorneys ready this consumer alert: William Hallatt, Emily Rumble, Arnold Pun, and Jane Lu.

Gibson Dunn’s attorneys can be found to help in addressing any questions you will have relating to these developments. When you want to focus on any of the issues set out above, please contact any member of Gibson Dunn’s Crypto Taskforce ([email protected]) or the International Monetary Regulatory workforce, together with the next authors in Hong Kong:

William R. Hallatt (+852 2214 3836, [email protected])
Grace Chong (+65 6507 3608, [email protected])
Emily Rumble (+852 2214 3839, [email protected])
Arnold Pun (+852 2214 3838, [email protected])
Becky Chung (+852 2214 3837, [email protected])

© 2022 Gibson, Dunn & Crutcher LLP

Legal professional Promoting:  The enclosed supplies have been ready for normal informational functions solely and will not be meant as authorized recommendation.

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