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What do crypto businesses need to know about staying compliant in Hong Kong in 2023? Let’s clear things up.
Hong Kong is considered one of the most attractive crypto destinations in the world.
According to the Worldwide Crypto Readiness Report, Hong Kong was the most “crypto-ready” location in 2022, topping all categories including number of blockchain startups per 100K people and the number of crypto ATMs proportional to the population. Notably, this put Hong Kong ahead of the United States and Switzerland in the rankings.
Nevertheless, those who want to start a crypto business in Hong Kong need to comply with fresh anti-money laundering (AML) regulations. In December 2022, the Legislative Council of Hong Kong passed an amendment to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) introducing a licensing regime for virtual asset service providers (VASPs).
Let’s see what VASPs need to comply with.
Hong Kong’s updated Anti-Money Laundering Ordinance aligns with FATF Recommendation 15, which requires VASPs to fall under anti-money laundering (AML) and countering the financing of terrorism (CFT) regulations.
Hong Kong’s new cryptocurrency regulations therefore require all VASPs to obtain a license from the Securities and Futures Commission (SFC). Without a license, a person must not:
Additionally, a person, who is not a licensed representative within the meaning of the Ordinance, must not:
The amended Ordinance also prohibits unlicensed persons from advertising VA services.
Hong Kong regulates activities related to the provision of VA services.
According to the Ordinance, VA services include, through means of electronic facilities, the following:
“(a) whereby—
(b) where client money or client virtual assets comes into direct or indirect possession of the person providing such service.”
Crypto trading platforms that enable trading in financial products (securities and futures contracts) don’t fall under the new licensing regime since they’re already regulated under the SFO.
Note that the new licensing regime extends to all crypto exchanges registered in Hong Kong under the Companies Ordinance (Cap. 622). These include exchanges based outside HK that actively market to Hong Kong’s citizens.
Under the new regime, crypto businesses must obtain a license from the Securities and Futures Commission, Hong Kong’s regulator of securities and futures markets.
To get licensed in Hong Kong, the applicant should:
The following persons are fit and proper person to be associated with the business of providing the VA service:
The SFC may impose any conditions on a granted license, including those relating to risk management, AML/CFT, financial resources, cybersecurity and other conditions, as specified in details in the Section 53 ZRK of the Ordinance.
The application must be submitted to the Commission in the specified manner and accompanied by the prescribed fee.
Case study: Indacoin Beats Fraud and Boosts Number of Orders with Sumsub
Under the new Ordinance, crypto businesses must follow regulatory requirements including:
– customer due diligence (CDD),
– transaction monitoring and record-keeping,
– screen clients against international sanctions and watchlists for PEP status
– screen clients in adverse media;
– comply with Travel Rule requirements.
A licensed provider must, within 1 month after it becomes licensed, notify the Commission, by written notice, of the date on which its financial year ends.
More detailed information regarding the requirements may be found in the Ordinance.
Violating these rules can be considered an offense. We’ll cover the sanctions in the next section.It should be noted that the corresponding Legislative Council Brief mentioned plans to impose requirements on licensed VASPs at the initial stage so they may only offer services to professional investors. It is also stated there that the professional investor requirement will be imposed as a regulatory requirement made by the SFC with the power given in the AMLO. In line with SFC’s usual practice, the SFC will finalize the detailed regulatory requirements upon the enactment of the amended ordinance, and consult the sector and the public on the whole set of requirements before promulgation.
The Ordinance determined a wide range of offenses. Here’s a breakdown of some of the sanctions businesses can face (for the exact list, please see the Ordinance):
Operation without a license: businesses can be fined as much as 5,000,000 HKD (640,000 USD), while senior management can face imprisonment for up to seven years, and, in the case of a continuing offense, a further fine of 100,000 HKD (12,700 USD) for every day during which the offense continues. The same will apply where an unlicensed person actively markets a VA service they provide outside Hong Kong to the Hong Kong public.
Violation of AML rules: in case of non-compliance with the statutory AML/CTF requirements, the licensed VASP and its responsible officers are liable to a fine of 1,000,000 HKD (128,000 USD) and to imprisonment for two years if convicted on indictment. They may also be subject to a range of disciplinary sanctions, including suspension or revocation of licenses, reprimand, an order to take remedial action and a pecuniary penalty (not exceeding 10,000,000 HKD (1,277,000 USD), or three times the amount of the profit gained or loss avoided, whichever is the greater) for misconduct such as contravening the AML/CTF or other regulatory requirements.
Provision of false, deceptive, or misleading statements about a business’s compliance status when filing a license application: a fine of 1,000,000 HKD (127,000 USD) and imprisonment for up to two years; on summary conviction a fine at level 6 and to imprisonment for 1 year.
Offense involving fraudulent or deceptive devices in VA transactions: a fine of 10,000,000 HKD (1,277,000 USD) and imprisonment for 10 years; or on summary conviction a fine of 1,000,000 HKD (127,000 USD) and imprisonment for 3 years.
Fraudulently or recklessly inducing others to invest in virtual assets: a fine of 1,000,000 HKD (127,000 USD) and imprisonment for 7 years; or on summary conviction, a fine at level 6 and imprisonment for 6 months.
Offenses to destroy, conceal, or alter accounts, records, or documents: a fine of 1,000,000 HKD (127,000 USD) and imprisonment for 7 years; or on summary conviction, a fine of 500,000 HKD (64,000 USD) and imprisonment for 1 year.
The SFC will be given broad powers to supervise AML/CTF and regulatory compliance by licensed VASPs. This will include powers to impose sanctions.
The Ordinance comes into effect on 1 April 2023.
Some of the provisions, however, including licensing requirements, come into effect on 1 June 2023:
and a number of others.
Although there is a 180-day transition period, we recommend businesses to start preparing for the new regulations as soon as possible and reviewing existing AML/CTF policies and controls to identify potential gaps with the requirements. Then, introduce the missing elements and stay updated on future SFC guidelines.
Yes, crypto is regulated under the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022. Securities and futures contracts, as well as stored value facilities, are separately regulated under the Securities and Futures Ordinance (SFO) and other regulations.
The Hong Kong Monetary Authority and the Securities and Futures Commission are the two main crypto regulators in Hong Kong.
No, cryptocurrency is not banned, and is not planned to be banned in Hong Kong. Rather, regulators are paying more attention to crypto with the new amendment recently introduced.
Yes. The new amendment to AMLO introduced a licensing regime for crypto exchanges.
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