Hong Kong to Align Crypto Regulatory Framework with FATF Standards

The government proposes to introduce a licensing regime for VASPs that trade non-security tokens, and a registration regime for dealers in precious metals and stones.

Hong Kong’s government has launched a consultation on legislative proposals to enhance the city’s AML/CTF regime, including through the introduction of a new licensing regime for VASPs (virtual asset services providers) that are currently unregulated.

“The legislative proposals are intended to bring Hong Kong’s regulatory regime up to date in line with the latest international requirements, as promulgated by the Financial Action Task Force (FATF),” reads an official statement, adding that the proposals will uphold the city’s credibility as a trusted and competitive place to invest and do business.

The consultation followed a keynote address from SFC (Securities and Futures Commission) chief Ashley Alder earlier in the day at Hong Kong Fintech Week, in which he explained that the “opt-in” regulatory framework for VASPs announced last year presents a “significant limitation” because it is restricted to platforms trading security tokens or a mixture of security and non-security tokens.

“Under the current legislative framework, if a platform operator is really determined to operate completely off the regulatory radar it can do so simply by ensuring that its traded crypto assets are not within the legal definition of a security,” Alder said.

To align with FATF requirements, the government is proposing to widen the supervisory net to cover centralised trading platforms that only trade non-security tokens, where the SFC will be empowered to license and supervise such platforms.

Licensing under the new regime will be similar to the existing regime and include requirements for platforms to initially only offer services to professional investors, properly segregate client assets, ensure wallet keys are properly managed, and have in place measures to deal with possible market manipulation – among other requirements.

“Once this new regime is in place all virtual asset trading platforms in Hong Kong would be regulated supervised and monitored,” Alder said. “If they’re operating in Hong Kong, or target Hong Kong investors, they would need to apply for an SFC license. Failure to do so would of course be an offence.”

“The SFC would have the ability to assess license applications, ensure compliance monitor the firm’s daily operations, investigate any irregularities and enforce the rules.”

The existing and new regimes will work in parallel: platforms that trade security tokens or a mixture of security and non-security tokens will continue to be regulated under the existing regime; and platforms that trade only non-security tokens will be regulated under the new regime.

So far, only one platform, OSL Digital Securities, has been granted ‘in-principle approval‘ to operate a virtual asset trading platform in Hong Kong under the existing regime.

Other amendments

The consultation also proposes to introduce a registration regime for dealers in precious metals, precious stones, precious products, or precious-asset-based instruments.

Under the proposal, dealers in precious metals and precious stones seeking to engage in cash transactions at or above HKD 120,000 during their course of business will be subject to AML/CTF requirements, in addition to meeting a fit-and-proper test for registration.

Other miscellaneous technical amendments will include:

  • amending the definition of a PEP (politically exposed person) to allow the exempt former PEPs from enhanced CDD requirements, and to specify that enhanced CDD requirements will apply to PEPs from other parts of China outside Hong Kong
  • better aligning of the definition of ‘beneficial owner’ in relation to a trust under the AMLO with that of ‘controlling person’ under the Inland Revenue Ordinance
  • providing for the use of “independent and reliable” digital identification schemes as a recognised means for customer identification and verification in situations where a customer is not physically present
  • increasing criminal penalties for operating an unlicensed money service business from HKD 100,000 and six months imprisonment to HKD 1 million and two years imprisonment
  • consolidating the different provisions to enable regulatory authorities to exchange supervisory information for AML/CTF purposes, and to add a confidentiality clause to prevent those subject to an investigation from divulging information that may jeopardise that investigation

The consultation, available here, is open for comment until 31 January 2021.

The government aims to introduce a bill into the Legislative Council in 2021.

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