The Monetary Service and Treasury Bureau launched a consultation paper on 3 November 2020, proposing amendments to the Anti-Cash Laundering and Counter-Terrorist Financing Ordinance (Chapter 615, Legal guidelines of Hong Kong)(“AMLO”) to introduce a licensing regime for digital asset providers suppliers (“VASP(s)”). River Stone, Pádraig Walsh and Alan Wong from the Technology and Regulation practices of Tanner De Witt summarise the important thing options proposed for the brand new VASP licence.
What actions are going to be regulated?
The VASP licence shall be obligatory for any particular person looking for to hold out enterprise in proposed regulated actions involving digital belongings. These actions embody:
- alternate between digital belongings and fiat currencies.
- alternate between a number of types of digital belongings.
- switch of digital belongings.
- safekeeping or administration of digital belongings or devices enabling management over digital belongings.
- participation in and provision of economic providers associated to an issuer’s supply or sale of digital belongings (generally often known as preliminary coin choices).
The first intention is to control the frequent actions and operations of a digital asset alternate. It is a buying and selling platform operated to permit a suggestion or invitation to be made to purchase or promote digital belongings in alternate for cash or digital belongings, and which the platform has custody, management, energy or possession of cash or digital asset in its enterprise. Though which may be the first intent, the scope of proposed regulated actions will embody greater than digital asset exchanges.
Some companies shall be expressly excluded. These are:
- Peer-to-peer buying and selling platform, to the extent that precise transaction is carried out outdoors the platform and the platform will not be concerned within the underlying transaction (that’s, decentralized exchanges).
- digital asset cost programs or custodian providers working as a standalone enterprise.
- over-the-counter buying and selling and crypto-ATMs.
What are digital belongings?
Beneath the proposal, digital belongings will need to have three key traits. Digital belongings shall be a digital illustration of worth that:
- is expressed as a unit of account or a retailer of financial worth;
- features as a medium of alternate accepted by the general public as cost for items or providers or for the discharge of a debt, or for funding functions; and
- could be transferred, saved or traded electronically.
It will cowl digital belongings backed by some type of belongings (generally often known as “stablecoins”).
There are some exclusions from the scope of digital belongings. These are:
- digital representations of fiat currencies (together with digital currencies issued by central banks).
- monetary belongings (e.g. securities and licensed structured merchandise) already regulated below the Securities and Futures Ordinance.
- Closed-loop, restricted goal gadgets which are non-transferable, non-exchangeable and non-fungible (resembling Asia miles, bank card rewards, reward playing cards, buyer loyalty programmes, or gaming cash).
It could be useful if saved worth services had been additionally expressly excluded. The operation of some SVFs may fall throughout the scope of the proposed definition for digital belongings. Nonetheless, there’s a separate regulatory regime for SVFs, and this must be acknowledged with an acceptable exclusion to keep away from any overlap within the proposed regime.
What are the licensing necessities?
An applicant should fulfil these licensing necessities:
- The applicant have to be included in Hong Kong and with a everlasting office in Hong Kong. A pure particular person or a enterprise with out a authorized character won’t be eligible.
- An applicant, its accountable officers and supreme homeowners should fulfill the fit-and-proper take a look at that applies to different monetary establishments regulated below the AMLO.
- An applicant should appoint at the least two accountable officers to imagine the overall accountability of guaranteeing compliance. These people shall be held personally accountable in case of non-compliance. All govt administrators of the applicant have to be accountable officers. The competence standards for accountable officers has not been outlined as but.
- An applicant should observe the AML/CTF necessities below Schedule 2 of the AMLO.
- The applicant should possess the technological capability and know-how to function the digital asset alternate.
We anticipate the requirement for a domestically included Hong Kong firm could change because the session progresses. Different regulatory regimes in Hong Kong permit for a non-Hong Kong firm that has registered a office in Hong Kong, and there’s no specific cause why the holder of a VASP Licence must be handled extra restrictively.
Will there be any licensing circumstances?
A VASP licence holder could also be required to adjust to extra licensing circumstances, that are much like these imposed on an SFC licensed alternate. These could embody:
- Companies can solely be supplied to purchasers who’re skilled traders.
- An applicant ought to possess sufficient monetary assets. These could be anticipated to be the identical as required for an SFC licensed alternate and holding at the least 12 months working bills.
- There must be a correct company governance construction, and an applicant is staffed by personnel with the required data and expertise.
- The enterprise must be operated prudently and soundly.
- There must be acceptable threat administration insurance policies and procedures for AML/CTF, cybersecurity and different dangers.
- There must be correct segregation of shopper belongings by putting them in an related entity with sufficient insurance policies and governance procedures to make sure correct administration and custody.
- There must be sturdy guidelines for the itemizing and buying and selling of digital belongings. All digital belongings have to be topic to cheap due diligence earlier than itemizing. The extent of the due diligence required is more likely to be much like these required for an SFC licensed alternate.
- An applicant ought to observe prescribed auditing and disclosure necessities and publish audited accounts.
- There must be insurance policies and controls to establish, forestall and report any market manipulative or abusive buying and selling actions.
- An applicant ought to keep away from any conflicts of pursuits. Specific consideration shall be paid to conflicts arising from partaking in proprietary buying and selling or market-making actions on a proprietary foundation. Candidates shall be anticipated to make use of info boundaries and firewalls between totally different features of the company construction and to implement different acceptable insurance policies to keep away from conflicts.
We are able to anticipate additional session and extra element on relevant codes and tips.
Who will supervise and regulate the licence?
The Securities and Futures Fee will course of, grant, supervise and regulate the VASP licence.
SFC regulatory powers will embody the facility to:
- enter enterprise premises.
- request the manufacturing of paperwork and information.
- examine and to impose administrative sanctions.
- appoint an auditor to look into affairs of a VASP licence holder.
- apply to the Courtroom for injunction orders.
The SFC may also be given these intervention powers:
- Prohibit the digital asset alternate from executing additional transactions and requiring it to hold out enterprise in a specified method.
- Limit the digital asset alternate from disposing of its property.
- Require the digital asset alternate to take care of its property in a specified method.
The VASP licence shall be an open-ended licence. This implies there won’t be any renewal utility and a VASP licence will stay legitimate till revoked by the SFC.
When should an applicant apply?
There shall be a 180-days transition interval for all operators to use for a VASP licence as soon as the licence turns into obtainable for utility. Any companies that fail to acquire a VASP licence after the transition interval will commit a felony offence.
What occurs if a digital asset alternate fails to conform?
Operation of a digital asset alternate with out a licence is a felony offence. This shall be punishable, on conviction on indictment, to a nice of HK$5,000,000 and to imprisonment for seven years. This may also cowl any digital asset alternate that operates abroad however actively markets its providers to the general public of Hong Kong with out a VASP licence.
There shall be a spread of different offences which can handle false or deceptive statements in an utility, breach of AML/CTF necessities, and fraudulent or reckless misrepresentations to within the sale of digital belongings.
Is the VASP licence the identical as a digital asset alternate buying and selling securities licensed by the SFC?
There are a number of necessities imposed on a digital asset alternate buying and selling securities licensed by the SFC (“SFC Licensed Trade”). Some extra necessities on an SFC Licensed Trade embody:
- A licensed holder should acquire and undergo the SFC written authorized opinion on the authorized and regulatory standing of a digital asset.
- There can’t be any monetary lodging to purchasers by an SFC Licensed Trade.
- The price construction of a licensed holder have to be clear, truthful and cheap.
- A licensed holder can’t publish commercials in reference to a selected digital asset.
- A shopper’s data in digital belongings have to be assessed, and a licensed company is topic to the suitability requirement.
- There have to be an efficient insurance coverage coverage in place.
- SFC’s approval have to be obtained earlier than incorporating new providers or actions or including any product to the buying and selling platform.
- Month-to-month reviews and an annual evaluate ready by knowledgeable agency have to be submitted to the SFC.
We anticipate that a few of these necessities shall be utilized below the VASP license regime, as soon as codes and tips are ready by the SFC.
What does this all imply?
The proposed licensing regime will work side-by-side with the present licensing regime for SFC Licensed Exchanges. The regulatory goal is to have a digital asset buying and selling setting the place considerably all cryptocurrency exchanges shall be licensed, even when they solely cope with digital belongings that aren’t securities or futures contracts. Hong Kong will turn into one of many few jurisdictions on the planet that absolutely regulates its cryptocurrency market.
Given the associated fee and burden of regulation, these adjustments could trigger some digital asset exchanges in Hong Kong to think about the scope of their operations in Hong Kong and will increase the bar too excessive for some revolutionary startups or early-stage companies to pick Hong Kong as its launching pad. Nonetheless, the steady and constant regulatory setting must be a magnet for extra mature digital asset exchanges which have already factored acceptable regulatory workstreams into their enterprise.
The deadline to submit feedback to the Monetary Companies and Treasury Bureau on the session paper is 31 January 2021. As soon as the session conclusions are taken under consideration, we anticipate there shall be extra session papers from the SFC quickly that may shed extra mild on the precise particulars of the VASP licence. A busy regulatory yr in cryptocurrency lies forward.