Do you need a licence? The SFC to licence virtual asset service providers in Hong Kong

Introduction

On 24 June 2022, the Hong Kong government published the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (the Amendment Bill) in the Gazette. The Amendment Bill introduces a new licensing regime (the Regime) which requires virtual asset service providers (the VASPs) to obtain a licence from the Securities and Futures Commission (the SFC) in order to operate a virtual asset (VA) exchange in Hong Kong. Licensed VASPs will be subject to the requirements stipulated by the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) and other requirements to be published and regulated by the SFC. The details of the Regime are further discussed below.

Scope of the Regime

The Regime requires VASPs to be licensed with the SFC. A VASP is a person who, as a business, provides a "VA service". "VA service" generally means the operation of a VA exchange through electronic facilities. VA is defined in the Amendment Bill to mean a cryptographically secured digital representation of value that is:

• Expressed as a unit of account or a store of economic value which (i) is either used (or intended to be used) as a medium of exchange accepted by the public for the payment of goods, services, discharge of a debt, or investment, or provides rights, eligibility or access to vote on the management, administration or governance of the affairs in connection with, or to vote on any change of the terms of any arrangement applicable to, any cryptographically secured digital representation of value, (ii) can be transferred, stored or traded electronically, and (iii) satisfies other characteristics prescribed by the SFC. 
• Other assets that are prescribed to be a VA by the Secretary for Financial Services and the Treasury.

There are exclusions from the definition of VA, such as digital currencies issued by a central bank or a government, limited purpose digital tokens, and any float or stored value facility deposits.

Licensing requirements

In order to obtain a VASP license, an applicant must:

• Be a locally incorporated company with a permanent place of business in Hong Kong.
• Appoint individuals who have obtained the SFC's approval to be responsible officers and/or licensed representatives. 
• Ensure its responsible officers and licensed representatives are fit and proper to manage the VASP business.
• Satisfy the conditions and regulatory requirements set by the SFC.
• Only offer services to professional investors.

Commencement and transitional period

The Regime will come into effect on 1 March 2023.

There will be a transitional period of 12 months for existing service providers who fall under the definition of VASP, as long as an application is filed with the SFC within nine months from 1 March 2023 and a confirmation that it has been providing VA service in Hong Kong immediately before 1 March 2023 and will comply with the relevant requirements that apply to VASPs is provided to the SFC.

What's next

Operators of platforms which allow the selling or buying of virtual assets should review the requirements of the Regime to ascertain whether their existing activities will trigger the licensing requirements, and if so, to prepare to submit to the SFC an application for a VASP licence as soon as possible.

Hogan Lovells is very well-prepared to assist, both in terms of advising on the impact of the Regime on your business, and in helping you apply for a VASP licence.

Authored by Mark Parsons and Katherine Tsang.