The new licensing regime for Virtual Asset Service Providers: The Amendment Bill

The long-awaited Virtual Asset Service Providers (“VASP”) licence regime is coming closer with the Hong Kong government gazetting the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 on 24 June 2022 (“Bill”). We reported on the key points of the consultation and the conclusion (collectively, the “Consultation Paper”) to the Consultation Paper in our previous articles. In this article, Pádraig Walsh and Alan Wong from the Fintech and Regulatory and Compliance practices of Tanner De Witt revisit the key points and compare them to the proposed amendments to the Anti-Money Laundering and Counter Terrorist Financing Ordinance (Cap. 615) (“AMLO”).

What is different?

The following amendments in the Bill differ from the Consultation Paper:

• In the Consultation Paper, virtual assets were defined to cover mainly payment tokens. The definition is broadened to include cryptographically secured digital representations of value that provides rights, eligibility or access to voting on the management, administration or governance of the affairs in connection with the token. This may now include the governance tokens in a Decentralised Finance (DeFi) protocol or a DAO protocol, such as UNI. Also, given the rapid development in the virtual asset sector, the Secretary for Financial Services and the Treasury will be empowered to prescribe by notice whether a particular asset is to be considered a virtual asset.
   
• The definition of virtual asset service is also expanded from the Consultation Paper, although it still focuses upon operating a virtual asset exchange. The proposed expanded definition may make it difficult for certain peer-to-peer platforms and over-the-counter trading platforms to determine whether their businesses fall within the scope of a virtual asset service. This will apply to platforms where users are required to link their wallets to the smart contracts deployed by the platforms so that virtual assets will automatically be withdrawn and transferred to the counterparty’s linked wallet.
   
• A person can be regarded as conducting a regulated function if he is outside Hong Kong, but actively markets those regulated services to the public in Hong Kong. The application of conducting “actively marketing” application is expanded in the Bill to also apply to individuals who performed the regulated functions.

What is new?

The Bill also created several new offences relating to transactions in virtual assets.

• Offence to issue, or possess for the purpose of issuing, advertisements relating to an unlicensed person’s provision of a virtual asset service.
   
• Offence to employ any device, scheme or artifice with intent to defraud or deceive in a transaction involving virtual assets.
   
• Offence to engage in any act, practice or course of business that is fraudulent or deceptive in a transaction involving virtual assets
   
• Offence to make a fraudulent or reckless misrepresentation to induce others to invest in virtual assets.

The fraud-related offences above are not limited to activities carried out on the exchange, and apply to any person, whether or not the person is a VASP licensee.

The Bill proposed to codify the Fit and Proper Guidelines published by the Securities and Futures Commission (“SFC”) into the AMLO. The scope of such Fit and Proper Guideline is broader than the existing fit and proper test in the AMLO, and will allow the SFC to consider additional relevant matters when considering whether a person is fit and proper.

The SFC’s power to impose licensing conditions has also been expanded. In the Consultation Paper, it was contemplated that the SFC would only impose licensing conditions under the Securities and Futures Ordinance (“SFO”) that are reasonable. The Bill allows the SFC to impose any conditions. The Bill also includes a list of licensing conditions that the SFC can impose. Some of these may have an impact on the operation of the exchanges, such as conditions on the virtual asset listing and trading policies of an exchange.

What is the same?

Other aspects of the VASP licence regime remain largely the same as published in the Consultation Paper. These are:

• Virtual assets will not cover digital representations of fiat currencies (including digital currencies issued by central banks or a government), securities and futures contracts, and limited-purpose digital tokens (such as customer loyalty or reward point and in-game asset). Stored value facility (SVF) deposit or float will also be excluded.
   
• Only a Hong Kong company or a registered non-Hong Kong company can apply for a VASP licence.
   
• A VASP licensee, its responsible officers, directors and ultimate owners must satisfy the fit and proper test.
   
• A VASP licensee must have at least two responsible officers.
   
• During an initial phase (still unspecified in duration), VASPs will be permitted to provide services only to professional investors.
   
• The customer due diligence and record-keeping requirements under the AMLO will apply to a VASP licensee.
   
• A VASP licensee will be subject to the same requirements on audited accounts and obligations to engage an auditor as those imposed on a SFC licensed entity.
   
• The SFC is given the same supervisory powers, disciplinary powers, intervention powers and power to apply for winding up orders as those granted to the SFC under the SFO.
   
• The VASP licence is an open-ended licence.

When?

It is intended that the amendments will be effective from 1 March 2023. All exchanges that were in operation before 1 March 2023 will be given a transition period of nine months until 30 November 2023 to make an application to the SFC for a VASP licence, or a clearance period of 12 months until 28 February 2024 to relocate their businesses away from Hong Kong. This is more than the 180 days transition period suggested in the Consultation Paper.

If an application is rejected, the applicant must close down its business within three months of being informed of the rejection, or by the end of the 12 months clearance period, whichever is later.

What’s next?

According to the LegCo Brief published by the Financial Services and Treasury Bureau (“FSTB”), a VASP licensee will be required to abide by a robust set of regulatory requirements to be imposed as licensing conditions by the SFC. This includes the requirement that a VASP licensee can only offer its services to professional investors, and will likely include the proposed requirements in the Consultation Paper. The FSTB also expects the SFC to carry out another public consultation before publishing its more detailed regulatory requirements.

Pádraig Walsh & Alan Wong

If you would like to discuss any of the matters raised in this article, please contact:

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.