Interpretation: Hong Kong government's 20 key points on cryptocurrency compliance documents
Written by: Gilbert Ng
Gilbert is a well-known lawyer in Asia Pacific specialized in crypto space. He had led the legal and compliance functions in various crypto exchanges including Huobi and OKX, and had advised crypto projects and crypto funds accumulatively raised over US$200M. He is currently a practising lawyer at the High Court of Hong Kong SAR.
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Background
1. The Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 has passed on 8 Dec 2022
2. Under the New Bill, all Virtual Assets Service Provider (VASP), i.e., VA trading platform carrying business in Hong Kong will need to be licensed and regulated by SFC.
3. According to the Bill, Virtual Asset Service (VA Service) is operating a VA exchange which (a) offers to sell or purchase VA; or (b) introduced others to conclude sales or purchases of VA; AND client money or client VA are in possession of the VASP (directly or indirectly) during the course of providing VA Service.
4. The VASP mainly covers centralized VA exchange. It MAY also covers OTC platform with custodian functions (depends on business model). BUT P2P transaction OR Defi protocol are out of the picture.
Transitional Period
5. SFC proposes a 12 month transitional period for existing VASP operating in Hong Kong to comply with the new licensing regime.
6. A VASP operates in Hong Kong before 1 June 2023 with meaningful and substantial presence may continue to operate during this transition period (up to 31 May 2024). Consideration factor includes:
a) Incorporation in Hong Kong
b) Physical office in Hong Kong
c) Hong Kong staffs as central management and control
d) Considerable clients and volume of trading activities in Hong Kong
7. Those existing VASPs, if intend to acquire the VASP license, shall submit application by 29 February 2024.
SFC Proposed Requirement
8. Paid up Capital of not less than HK$5,000,000, and not less than 12 month’s operating expenses in liquid assets.
9. SFC proposes to allow retail investor to access licensed VASP, but VASP will be required to access retail investor’s risks tolerance and may limit retail investor exposure to VA.
10. Safe Custody of Client Asset — All client money and VA shall be hold under the VASP’s subsidiary (with TCSP license). The existing requirement is no more than 2% of client VA should be store in hot wallet. Seeds and Private Keys must be stored in Hong Kong
11. VASP will conduct token due diligence before listing. Criteria includes background of token project team, token’s regulatory status, liquidity, security infrastructure. However, retail investor could only invest into “Large-Cap” VA (predominately only top 3 or top 5 tokens). Additional token due diligence include:
a) Smart contract audit
b) Legal opinion confirming that token does not fall within the definition of “securities”
12. SFC understands that there are practical difficulties to acquire an insurance to cover client VA stored in hot wallet and cold wallet. SFC proposes to accept compensation arrangement to cover investors’ loss such as hacking incidents.
13. VASP are not allowed to offer or trade in VA futures contracts or derivatives.
14. The previous security tokens requirement is proposed to be removed for VASP.
15. SFC requires VASP to impose “Travel Rule” requirement which means that VASP shall have a record of the identity of the person who send VA to its client and the person who receive VA from its client, and to exchange clients’ information with other VASP from other jurisdictions.
16. SFC proposed that VASP should not provide algo trading services to clients OR “staking”/”Earn” services.
Old VA trading Platform and New VASP Regime
17.SFC made it clear that the old VA trading platform license (which OSL and Haskey has obtained) is to regulate trading of security tokens and the new VASP licensing regime is to regulate non-security tokens. IF a platform wishes to trade both security tokens and non-security token, they should apply for both licenses (A single consolidated application will suffice)
Responsible Officer Requirement
18. VASP requires to have at least 2 Responsible Officers (RO) to be the executive director of the VASP. At least 1 of the RO must be resided in Hong Kong. Other key employees include Compliance Officer, Money Laundering Reporting Officer, Managers in Charge (e.g. risk managers)
19. Requirement of RO includes:
a) Fit and Proper Requirements
b) No criminal record, not disqualified by any professional or regulatory body, not be disqualified by a court from being a director, not a director of an insolvent company
c) Passed Hong Kong Securities and Investment Institute (HKSI) 1 & 2
d) VA industry experience (SFC may accept non-regulated industry experience environment if the activities are exempted from licensing requirement)
e) At least 12 hours / year of continuing professional training (CPT) requirement
External Assessment Report Requirement
20.SFC also requires all VASP license applicants to obtain 2 independent assessment reports (one before submission of license, and another one after approval in principal). The key areas to be assessed are:
(a) governance and staffing;
(b) token admission;
(c)custody of virtual assets;
(d) KYC, AML/CFT;
(e) market surveillance;
(f) risk management; and
(g) cybersecurity
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