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Dual Licensing Regime: A New Era for Virtual Asset Trading Platforms in Hong Kong

Hong Kong's digital landscape is undergoing a transformation. To bolster the growth of Web3 and virtual asset sectors, the government has initiated several proactive measures. One of these strides is the introduction of a new regulatory licensing regime to govern virtual asset trading platforms.


Initial Regulatory Framework for Virtual Asset Exchanges


Under the Securities and Futures Ordinance (Cap. 571) (SFO), the Securities and Futures Commission of Hong Kong (SFC) implemented an opt-in licensing regime. This allowed virtual asset exchanges to apply for SFC licenses to trade in both securities-type and non-securities-type virtual assets, effectively bringing them under SFC's supervisory umbrella.


The Turn of Tides: Amendments to the AMLO


In December 2022, a significant change came about with amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), otherwise known as the AMLO. These changes heralded a new licensing regime (AMLO Licensing Regime) for centralized virtual asset service providers (VASPs), bringing them under the SFC's purview. This move introduced statutory anti-money laundering and counter-financing of terrorism (AML/CFT) obligations, as well as new penalties for noncompliance.


Unveiling the Dual Licensing Regime


June 1, 2023, marked a watershed moment in Hong Kong's virtual asset trading industry with the initiation of the Dual Licensing Regime for virtual asset trading platforms (VATPs), following SFC's Consultation Conclusions in May 2023.


The Role of the Securities and Futures Commission (SFC)


The SFC has been empowered to regulate VATPs for their dealings with security and non-security tokens under the SFO and the AMLO. The SFC’s authority to supervise security tokens and any other virtual asset products classified as "security" under the SFO regime continues, but it has gained additional supervisory powers over non-security tokens under the new AMLO regime.


Defining the Regulatory Groundwork: Key Laws and Guidelines


VATPs, now deemed Platform Operators, must adhere to the laws and regulations specified in the SFO and AMLO, along with the Guidelines for Virtual Asset Trading Platform Operators (VATP Guidelines) released in May 2023. These guidelines define critical requirements that Platform Operators must comply with, ranging from establishment requirements (like fitness, competency, and financial soundness) to ongoing obligations (like client onboarding procedures, asset custody, due diligence, cybersecurity, and operational control).


Tackling Money Laundering and Terrorism Financing: Supplementary Guidelines

To further reinforce the AML/CFT obligations, the SFC has provided supplementary guidelines, including the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism, and the Prevention of Money Laundering and Terrorist Financing Guideline. These guidelines are tailored to the unique nature of virtual assets, underscoring the importance of AML/CFT measures in this rapidly growing field.


Identifying Potential Licensees


The AMLO Licensing Regime mandates an SFC license for anyone in Hong Kong who operates or advertises the operation of a virtual asset service. Additionally, any individual or entity, regardless of geographical location, actively marketing any virtual asset service to the Hong Kong public must also obtain this license.


For VATP operators providing virtual asset services before June 2023, the SFC has outlined transitional arrangements under the AMLO Licensing Regime, potentially easing their transition into the new regulatory landscape.


Consequences of Noncompliance


The penalties for noncompliance under the AMLO are severe. Failure to meet the licensing requirements can result in a fine of HK$5 million and imprisonment for seven years, with additional fines for continuing offenses. Moreover, the AMLO Licensing Regime introduces two criminal offenses for fraudulent activities involving virtual assets, applicable to any individual, not just VASPs. The penalties range from hefty fines to substantial periods of imprisonment, further underlining the serious consequences of disregarding the new regulatory measures.


At Prokopiev Law Group, we stand ready to guide you through the intricate landscape of the Dual Licensing Regime. Leveraging our broad global network, we ensure your compliance worldwide in this rapidly evolving sector. Don't hesitate to contact us for tailored guidance uniquely suited to navigate your business through the complexities of virtual asset trading. Reach out today, and let us help you unlock new opportunities. DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.

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