- Hong Kong Virtual Asset Service Providers (VASPs) are businesses that offer services related to virtual assets, such as buying, selling, storing, and transferring cryptocurrencies or digital tokens. According to a survey by the Hong Kong Blockchain Association, the number of Hong Kong residents owning cryptocurrencies increased by 75% in 2020, with Bitcoin being the most popular virtual asset. VASPs are recognized as part of the financial industry by the Hong Kong government and are regulated under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance.
- The popularity of virtual assets in Hong Kong has significantly increased over the past few years, with more and more people and businesses becoming interested in investing in cryptocurrencies and other digital tokens as well as securing Hong Kong cryptocurrency licenses. This boom is partly due to the rise in popularity of Bitcoin and other virtual currencies, as well as the increasing acceptance of blockchain technology. The Hong Kong government has been supportive of the growth of the virtual asset industry, recognizing its potential to bring economic benefits to the city. However, it also acknowledges the importance of regulation to prevent money laundering and other illegal activities.
- To this end, the Hong Kong government has implemented a regulatory framework for virtual assets that requires VASPs to follow strict compliance requirements, including the need to obtain a license from the Securities and Futures Commission (SFC) before offering virtual asset services in Hong Kong. The SFC also regularly monitors VASPs to ensure they are following the regulations and complying with the anti-money laundering and counter-terrorist financing requirements. In summary, Hong Kong VASPs are businesses that provide virtual asset-related services and are regulated under the AMLO. The increasing popularity of virtual assets in Hong Kong, with 70% of Hong Kong residents expressing interest in investing in virtual assets, has led to a boom in the industry, and the government is supportive of its growth while also regulating it to prevent illegal activities.
- Tetra Consultants is an international consulting firm that assists clients all over the globe with the process of obtaining cryptocurrency licenses like the Hong Kong VASP license. Our main goal is to support you throughout the licensing process so that you can channel your energy onto other important aspects of your business. Our comprehensive service package includes everything you need to get your virtual exchange started in Hong Kong, like registration of a domestic entity in Hong Kong, provision of a company secretary, registered legal address, nominee director service, corporate bank account opening as well as assistance under our regulatory compliance consulting services to ensure continuous compliance with the legal obligations. Our team of experts for obtaining offshore financial licenses has outlined the key takeaways from the newly introduced Hong Kong VASP License regime for VA exchanges.
Background of Hong Kong VASP License Regime
- A new licensing regime for virtual asset service providers (VASPs) was to come into effect on 1 March 2023 under proposed amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (the AMLO) which were introduced to Hong Kong’s Legislative Council on 6 July 2022. The proposed amendments set out in the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (Amendment Bill) will also introduce a new registration regime for dealers in special metals and stones and other amendments addressing various technical issues raised by the Financial Action Task Force (FATF).
- The legislative amendments were aimed at implementing the FATF requirements that virtual asset service providers are subject to the same anti-money laundering and counter-terrorist financing (AML/CTF) obligations as financial institutions and to a statutory licensing or registration regime.
- On 7 December 2022, the Hong Kong Legislative Council (HK Legco) published its “Report of the Bills Committee on Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (the HK AML/CTF (Amendment) Bill 2022)” and stated its intention to postpone the commencement of the HK AML/CTF (Amendment) Bill 2022 to allow the Administration and the SFC more time “to work out the implementation details of the new regime”, including time for the SFC to conduct market and public consultation on Hong Kong Virtual Asset Service Provider (HK VASPs) regulatory requirements. The new commencement date of the HK AML/CTF Bill 2022 was decided to be 1 April 2023 rather than 1 January 2023, while the commencement date for provisions on:
- The restrictions on a business providing virtual asset service;
- The transitional arrangements for the licensing requirements of HK VASPs; and
- “Politically Exposed Persons (PEPs), former PEPs and “beneficial owners in relation to trusts” etc”;
- Accordingly, the effective date is considered to be 1 June 2023 rather than 1 March 2023.
- Therefore, implementing legislation for the VASP scheme currently is in the form of the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022 (the “Ordinance”) specified that the licensing regime for virtual asset services is to come into operation on 1 June 2023.
- While, existing HK VASPs may continue to operate without a VASP license for up to 12 months from the commencement date of the relevant provisions, meaning until 31 May 2024 (the HK VASP Transitional Period). In order to qualify as a deemed licensee or be granted deemed approval beyond the expiration of the HK VASP Transitional Period, an existing HK VASP must submit its license application to the Hong Kong Securities and Futures Commission (the SFC) by no later than 29 February 2024, after which their status as a deemed licensee or granting of deemed approval will continue until the earlier of
- (i) The SFC’s grant or refusal of its license; or
- (ii) The withdrawal of the license application.
Why do you need a Hong Kong VASP license?
- In Hong Kong, it is mandatory for individuals or entities offering virtual asset services (VA services) to possess a Virtual Asset Service Provider (VASP) license issued by the Securities and Futures Commission (SFC). Engaging in the marketing of VA services to the general public in Hong Kong without holding a VASP license is considered a violation. Presently, the definition of “providing a VA service” is limited to operating a VA exchange, although the Secretary for Financial Services and the Treasury have the authority to modify this definition. Operators of VA exchanges in Hong Kong must obtain a license or cease their operations within the city. The Amendment Bill includes transitional provisions for those who were conducting business in Hong Kong prior to March 1, 2023. Further, once the new regulations come into effect, overseas VA exchanges will be prohibited from actively promoting their services in Hong Kong.
Key takeaways from the ordinance
- Scope of Virtual Assets: According to the proposed definition, virtual assets will refer to digital representations of value that are secured cryptographically and can be electronically traded, transferred, or stored. These assets can either be a store of economic value or expressed as a unit of account. They may also serve as a medium of exchange, a mode of payment for goods and services, a discharge of debt, or an investment. Additionally, these assets may provide the right to access or vote on the management or governance of the affairs associated with digital representations of value or any changes to their terms. The scope of the definition includes altcoins, Bitcoin, and stablecoins regardless of their underlying assets, while governance tokens and NFTs may also be covered. However, the definition excludes fiat currency digital representations, financial assets regulated under the SFO, limited-purpose digital tokens such as air miles and customer loyalty programs, and stored-value facilities.\
- VA Exchanges: Operating a virtual asset (VA) exchange will be considered as providing VA services through electronic facilities under the following conditions:
a. Regular offers to sell or purchase virtual assets are made or accepted, resulting in a binding transaction.
b. Persons are regularly introduced or identified to negotiate or conclude sales or purchases of virtual assets, or there is a reasonable expectation of such negotiations or conclusions.
c. The person providing the service has direct or indirect possession of client money or client virtual assets.
- Eligibility criteria for obtaining a Hong Kong VASP license: Hong Kong-incorporated companies that have a permanent establishment within Hong Kong, along with companies not based in Hong Kong but registered under the Companies Ordinance (Cap. 622), are eligible to apply for licenses as Virtual Asset Service Providers (VASPs). However, entities that lack a separate legal entity status, such as partnerships and sole traders, as well as individuals and overseas companies not registered in Hong Kong, are not eligible to obtain VASP licenses.
- Functional requirements: Applicants seeking a license as a Virtual Asset Service Provider (VASP), along with their responsible officers, licensed representatives, directors, and ultimate owners, are required to successfully pass the fit and proper test, as outlined in the Fit and Proper Guidelines published by the Securities and Futures Commission (SFC). The VASP applicant must appoint a minimum of two responsible officers who will bear the responsibility of overseeing the licensed VASP’s operations and ensuring compliance with relevant legislation and regulatory obligations. The requirements for responsible officers of VASPs align with those applicable to responsible officers of licensed corporations under the Securities and Futures Ordinance (SFO) and entail the following:
- At least one responsible officer must hold the position of executive director within the VASP applicant.
- If the VASP applicant has multiple executive directors, all of them must be appointed as responsible officers.
- At least one responsible officer must be a permanent resident of Hong Kong.
- At least one responsible officer must be available at all times to supervise the VASP’s business operations.
5. Other eligibility requirements: As stated in the Legislative Council Brief issued by the Financial Services and the Treasury Bureau (FSTB), applicants seeking licensing as Virtual Asset Service Providers (VASPs) must adhere to a comprehensive set of regulatory requirements imposed as licensing conditions by the Securities and Futures Commission (SFC). The focus of these requirements is to safeguard investor interests and encompasses the following aspects:
- Evaluation of the company and management structure of VASP licensing applicants.
- Verification of a robust and viable business model, including the implementation of detailed risk management policies and measures to prevent listing and counter-market manipulation.
- VASP licensing applicants must demonstrate sufficient financial resources, although a specific minimum amount has not yet been specified.
- During the initial phase of the licensing regime (duration unspecified), licensed VASPs are restricted to offering services exclusively to professional investors. This provision allows the SFC the flexibility to make necessary adjustments without the requirement of amending the existing legislation.
6. Penalty and enforcement actions: Engaging in the operation of a Virtual Asset (VA) exchange in Hong Kong without obtaining a proper license, or actively promoting the services of an overseas VA exchange that is not licensed in Hong Kong to the general public of Hong Kong, without a reasonable justification, will be considered an offense. Conviction on indictment for such offenses may result in a fine of HK$5 million and imprisonment for a period of seven years. In the case of a continuing offense, an additional fine of HK$100,000 may be imposed for each day during which the offense persists. For summary convictions, fines of up to HK$500,000 and imprisonment for up to two years may be imposed, along with a further fine of HK$10,000 for each day the offense continues.
How can Tetra Consultants assist with Hong Kong VASPs License?
- Step 1: Initial Assessment: As a business consulting firm, our services begin with an initial assessment to evaluate your eligibility and readiness to apply for a VASP license in Hong Kong. We assess your business structure, management team, and compliance capabilities to determine the best course of action for obtaining a Hong Kong cryptocurrency license.
- Step 2: Register company in Hong Kong: If you do not have a domestic Hong Kong company already incorporated, our experts can assist you with the company formation process. We provide comprehensive incorporation services, including company name search, provision of local address, agent and Hong Kong nominee director, preparation of necessary documents, liaison with relevant authorities, and guidance on legal and regulatory requirements. Our aim is to ensure a smooth and efficient incorporation process that meets your specific needs. Our team expects to complete the company registration process with Hong Kong Companies Registry within 1 week.
- Step 3: Appointing Responsible Officers: We assist you in identifying and appointing at least two responsible officers who will oversee the operations of your licensed VASP and ensure compliance with AML/CTF requirements. Our team ensures that the responsible officers meet the necessary qualifications and residency criteria set by the regulatory authorities. Tetra Consultants team can assist with the recruitment of compliance officers who can ensure compliance with the AML/CFT requirements.
- Step 4: Developing AML/CFT Policies, Procedures, and Controls: Our experienced consultants work closely with you to develop comprehensive AML/CFT policies, procedures, and controls tailored to your specific business needs. We cover essential areas such as risk assessment, customer due diligence (CDD), ongoing customer monitoring, suspicious transactions reporting, record keeping, and staff training. Our aim is to create AML/CFT systems that align with the risk-based approach and adhere to all relevant statutory and regulatory requirements.
- Step 5: Implementing AML/CFT Systems: We assist you in implementing effective AML/CFT systems based on the developed policies, procedures, and controls. Our team helps you establish robust risk assessment mechanisms, implement thorough customer due diligence measures, set up ongoing customer monitoring processes, facilitate suspicious transactions reporting mechanisms, establish comprehensive record-keeping practices, and organize staff training programs. Our goal is to ensure that your AML/CFT systems operate efficiently and meet regulatory standards.
- Step 6: Adoption of reliable AML/CFT solution: We advise you on adopting reliable AML/CFT solutions to enhance the efficiency and effectiveness of your AML/CFT processes. Our experts guide you through the selection, implementation, and integration of appropriate screening, due diligence (KYC), risk assessment, and ongoing monitoring tools. We ensure that the chosen solution aligns with regulatory requirements and industry best practices, providing you with peace of mind.
- Step 7: Hong Kong VASP license application submission and support: Our consulting firm assists you in preparing and submitting the Hong Kong VASP license application. We ensure that all required documents, forms, and information are complete, accurate, and submitted in a timely manner. Throughout the process, we review your application package, provide guidance on any additional requirements, and offer ongoing support to address any queries or concerns.
- Step 8: Compliance monitoring and maintenance: Once your Hong Kong VASP license is obtained, our services continue with compliance monitoring and maintenance. We conduct regular reviews of your AML/CFT systems, policies, and procedures to ensure ongoing compliance. We assist you with regulatory reporting obligations and keep you updated with the latest AML/CFT regulations and best practices. Our aim is to help you maintain a strong and compliant framework in a dynamic regulatory environment.
- In conclusion, obtaining a VASP license in Hong Kong is a meticulous process that requires comprehensive compliance with regulatory requirements. As a trusted business consulting firm, Tetra Consultants provide a range of services to assist you throughout this journey. From conducting an initial assessment of your eligibility to guiding you through the steps to register company in Hong Kong, appointing responsible officers, and developing robust AML/CFT policies and controls, our expertise ensures that you meet the necessary standards before obtaining a Hong Kong cryptocurrency license.
- Additionally, we offer support in implementing reliable AML/CFT solutions to streamline your compliance procedures, leveraging services to enhance efficiency and effectiveness. With our assistance, you can confidently navigate the application process, submit a well-prepared application, and maintain compliance with AML/CTF regulations even after obtaining the Hong Kong VASP license. Our commitment to excellence and industry best practices empowers you to establish a strong foundation for your VASP operations while safeguarding against money laundering and terrorist financing risks.
- Contact us to know more about how to apply for a Hong Kong VASP License under the new regime and our team of licensing experts will revert within the next 24 hours.