HONG KONG VIRTUAL ASSET REGULATION IN 2022 AND BEYOND – WHAT YOU NEED TO KNOW

After a frantic year for digital assets, we explore the major themes and look ahead to a kinetic 2023

Have you been keeping up to date with the latest virtual asset (VA) developments in Hong Kong? They continue to come thick and fast. We set out below a wrap-up of the most recent developments, including in relation to the new virtual asset service provider (VASP) licensing regime, warnings from the Securities and Futures Commission (SFC), amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), and what to expect in the new year.

For background information, please refer to our June 2022 and November 2022 briefings, which discuss the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (Amendment Bill) and highlights from the Hong Kong and Singapore Fintech Weeks.

Key takeaways

• The SFC issued a statement on 13 December 2022 to the effect that VA arrangements claiming to offer returns to investors could amount to collective investment schemes and may be restricted under the Securities and Futures Ordinance. The SFC warned that investors may suffer significant loss as VA arrangements, and a vast majority of VA platforms offering VA arrangements, are unregulated.
• Following the publication of the Report of the Bills Committee dated 29 November 2022 (Bills Committee Report) on the Amendment Bill, the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022 (Amendment Ordinance) was gazetted on 16 December 2022. The Amendment Ordinance includes further changes to the new VASP licensing regime and anti-money laundering and counter-terrorist financing regulatory requirements following deliberation by the Legislative Council (LegCo).
• The implementation of the VASP licensing regime has been postponed by three months to 1 June 2023. The transitional periods under the regime have been adjusted accordingly.
• Two new criminal offences specific to fraud involving VAs will take effect on 1 April 2023 (before the commencement of the VASP licensing regime). These provisions will apply to any person (not just VASPs).
• Whether a non-fungible token (NFT) falls within the definition of VA under the amended AMLO will depend on the nature and functions of the NFT in practice. Where the characteristics of a specific NFT go beyond the boundary of a collectible, it is more likely to qualify as a VA.
• Financial institutions (FIs), now including licensed VASPs, will need to perform customer due diligence (CDD) measures before carrying out an occasional transaction that is a transfer involving VAs amounting to HK$8,000 or above. Licensed VASPs will also need to perform CDD measures before carrying out an occasional transaction involving HK$8,000 or above which is not a wire transfer or VA transfer.
• Client assets of a licensed VASP are not liable to be taken in execution against a licensed VASP or its associated entities under an order or process of a court. This serves to further protect client assets by ringfencing and excluding them from any orders or processes for enforcement of judgments and execution of those orders against a licensed VASP.
• The SFC has been diligently working on the operational and conduct regulatory requirements to apply to licensed VASPs and will consult the public on proposed measures very soon.
• A number of miscellaneous amendments have also been made to the AMLO, including amending the definition of politically exposed persons (PEPs) and facilitating a risk-based approach in determining the degree of CDD to be performed on former PEPs. These PEP-related amendments will come into operation on 1 June 2023 to provide sufficient time for preparatory work.
• The Hong Kong Monetary Authority (HKMA) has issued a circular on the passing of the Amendment Bill and will soon consult the banking sector on corresponding changes to the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Authorised Institutions) as well as specific guidance on topical issues.