Hong Kong’s Licensing Scheme for Virtual Asset Service Providers | Dechert srl



The Hong Kong government issued the conclusions of its public consultation on a proposed licensing regime for virtual asset service providers (“VASP“) on May 21, 2021 (the”Conclusions of consultationsHaving received broad support for its proposals, the government will now proceed with the development of a bill without any significant modification of the consultation proposals and aims to present a bill in the legislative session 2021- 2022.

Proposed licensing regime

The proposal to introduce a licensing regime for VASPs (the “Proposal“) were part of the Bureau of Financial Services and Treasury (“FSTB“) public consultation on strengthening the fight against money laundering and the financing of terrorism (“AML / CFT“) settlement in Hong Kong, which expired on January 31, 2021. The proposal has been prepared in accordance with the recommendations of the Financial Action Task Force (“FATF“) on VASPs. As of November 2019, the Securities and Futures Commission (“SFC“) maintained a set of voluntary regulatory standards for virtual asset trading platforms (the”Membership schemeHowever, the opt-in regime only covers trading platforms that offer at least one virtual asset that is a “security” and the proposal aims to extend the regulatory powers of the SFC in this rapidly evolving area. .

The proposal amends the Anti-Money Laundering Ordinance (“AMLO“) to designate the activity of operating a” virtual asset exchange “as a” regulated VA activity “and to require any person carrying out such activity to obtain a VASP license from the SFC. the proposal, only companies incorporated in Hong Kong will be eligible to apply for a VASP license, to ensure that licensees have a permanent establishment and an appropriate scale of operation1 in Hong Kong. Persons who are not approved VASPs will be prohibited from actively marketing2 services associated with trading virtual assets to the public in Hong Kong, whether in Hong Kong or from elsewhere.

Licensed VASPs will initially be limited to offering virtual asset trading services to “professional investors”,3 which means that exchanges of virtual assets will be prohibited from dealing with retail clients. According to the consultation’s findings, more than 40% of those surveyed believe that retail investors should also be allowed to participate in virtual asset exchanges (making this possibly the most contested issue in the proposal). However, the government believes the restriction is necessary to protect the investing public in Hong Kong, at least for the initial phase of the licensing regime, although it will continue to monitor and review this position.

It is expected that the definition of “exchange of virtual assets”4 will include virtual asset trading platforms, but not pure peer-to-peer trading platforms.

‘Virtual assets’ will include what is commonly described as cryptocurrencies and ‘stablecoins’, but will not include digital representations of fiat currencies (including digital currency issued by the central bank) and others. financial products already regulated under the Securities and Futures Ordinance (“OFS“). The definition of” virtual assets “5 excludes closed-loop, limited-use items that are non-transferable, non-exchangeable and non-fungible (eg, airline miles, credit card rewards, game coins, etc.). Respondents to the consultation requested further clarification on the definition. In our opinion, it is currently unclear whether the definition of a “virtual asset” excludes non-fungible tokens or whether it makes a distinction between a “proof of work” or “proof of stake” protocol. In view of the rapidly changing market for virtual assets, the government proposes to empower the SFC to prescribe characteristics that constitute a “virtual asset” and to allow the Secretary of Financial Services and Treasury to determine whether a digital representation of the value constitutes a “virtual asset”.

Respondents to the consultation also questioned the need to allow SFC to enter the business premises of a licensed VASP, noting that the operations of VASPs are different from those of conventional financial institutions. However, the government has stressed the need for VASPs to maintain a permanent establishment in Hong Kong and to meet regulatory requirements similar to those of licensed financial institutions in Hong Kong.

Like licenses for other types of regulated activities, licensed VASPs, their responsible agents and ultimate owners will be subject to a suitability test. To ensure proper management, the VASP authorization holder should appoint at least two officers responsible for ensuring compliance with AML / CFT and other regulatory requirements. Among other requirements, an approved VASP will need to maintain adequate financial resources, with details of the required amount that should be included in the bill or subsidiary legislation.

Next steps

The conclusions of the consultation appear to pave the way for the implementation of the proposal as an amendment to AMLO. If and when the changes come into effect, the licensing and supervisory powers of the SFC will for the first time be substantially extended beyond the framework established by the SFO.

Footnotes

1) See the description of licensing requirements and fit and proper testing in the last paragraph of this section.

2) The Proposal refers to the concept of “active marketing” under section 115 of the Securities and Futures Ordinance (“SFO”).

3) Although not specifically defined in the proposal, the definition of “professional investor” will likely refer to its definition in Section 1 of Part I of the SFO, as is the case under the regime. optional membership.

4) Defined as any trading platform operated for the purpose of enabling an offer or invitation to buy or sell any virtual asset in exchange for any sum of money or any virtual asset (whether of the same type or different type), and who comes into the custody, control, power or possession of, or over, any money or virtual asset at any time during its business.

5) Defined as a numerical representation of value which (i) is expressed as a unit of account or store of economic value; (ii) operates (or is intended to operate) as a means of exchange accepted by the public in payment for goods or services or for the discharge of debt, or for investment purposes; and (iii) can be transferred, stored or traded electronically.



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