Hong Kong Tightens Virtual Asset Regulations

  • Hong Kong is tightening its regulation of virtual assets with a new proposed scheme.
  • The move, spearheaded by the Financial Action Task Force, is directed toward increased compliance for virtual asset service providers.

The Securities and Futures Commission of Hong Kong announced a new regulatory framework for virtual asset trading early last week. The announcement was made by Ashley Alder, CEO of Hong Kong’s Securities and Futures Commission (SFC), at Hong Kong Fintech Week 2020.

The new framework suggests that Hong Kong-based exchanges offering non-security tokens be brought under the regulatory purview of the SFC, meaning that centralized virtual asset trading platforms in Hong Kong will have to meet an increased number of compliance requirements.

In her keynote address at Hong Kong Fintech Week 2020, SFC Director Clara Chiu noted that platforms trading security tokens or a mix of security and non-security tokens were already allowed to apply for an SFC license under an opt-in framework announced last year. The new proposal is aimed solely at non-security tokens.

The new regime aims to “widen the supervisory net over centralized virtual asset trading platforms so that Hong Kong can comply with the requirements of the Financial Action Task Force (FATF), which is the global [anti-money laundering] watch dog,” Chiu said in her address.

What the new regulations mean for virtual asset exchanges

In a Financial Services and Treasury Bureau (FSTB) consultation paper on a proposed regulatory regime, the institution suggests that new virtual asset regulations would bolster Anti-Money Laundering and Counter-Terrorist Financing (AML/CTF) regulations in Hong Kong.

It noted that virtual assets were exposed to ML/TF risks because of their anonymity, decentralization, and speculative nature.

The proposed regime empowers the SFC to license and supervise virtual asset exchange operators similar to existing SFC license holders, Chiu explained.

For instance, licensed platforms can only offer services to professional investors at the initial stages. They will also have to segregate between client and own assets, ensure proper management of wallet keys, and have measures in place for possible market manipulation activities.

Serious breaches will invite interventions and restrictions on business, Chiu added.

According to the consultation paper, operators running unlicensed virtual exchanges will face a fine of HK$5 million and up to seven years’ imprisonment. It also gives the SFC powers to inspect the business premises of licensed exchanges, check their records, and impose restrictions or administrative sanctions.

Further, because licensed platforms will only be able to serve professional investors (per the consultation paper), it effectively bans the retail trading of virtual assets.

Scope of the proposed regulatory regime

Chiu noted that the paper pertains to centralized automated platforms trading non-security tokens, such as Bitcoin and Ether. Decentralized virtual asset exchanges will not be affected by the proposed changes.

Further, going by the definition of virtual assets in the paper, digital representations of fiat currencies and financial assets will also not be covered by the proposal.

Chiu clarified that the proposed regime will co-exist with the existing regime. This means that platforms trading security tokens or a mix of non-security tokens will be regulated under the existing regime and will not need a new license under the new proposed regime.

Chiu also noted that the proposed regime will need to go through Hong Kong’s legislative process even if the consultation is agreed to by consulting parties. The FSTB is accepting comments on the paper until January 31 next year.

Hong Kong is already “largely compliant” with many of the FATF’s regulatory standards on anti-money laundering and counter-terrorist financing. The new proposal is seen as a means to further increase Hong Kong’s compliance with standards on virtual asset service provider as a FATF member.

Header image by jcomp on Freepik

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