Hong Kong Begins Tightening Screws on Exchanges With Proposed Regulations

Crypto exchanges in Hong Kong may be in for a rough ride, as strict new licensing regulations severely limit the clientele exchanges may have.

The writing is on the wall for crypto exchanges in Hong Kong. Okay, maybe not, but the government is looking to rein in the crypto industry in Hong Kong. The crypto industry in Hong Kong is represented most abundantly by the number of crypto exchanges in the region. The government has proposed a new licensing regime. This is in response to the Financial Action Task Force’s standards, detailed in 40 Recommendations and 11 immediate outcomes. Hong Kong has been part of the FATF for over thirty years. In 2019, a report was released by the FATF, commending Hong Kong for its system for combating money laundering and terrorism financing (MLTF).

Now, the FATF has updated its standards to require virtual asset service providers (VASPs) to comply with the same anti-money laundering and counterterrorism financing (AML/CTF) that financial institutions and non-financial businesses and professions comply with. Hong Kong’s new licensing regime is to keep in step with the revisions put forth by the FATF. The Hong Kong government believes that the anonymity and decentralization of virtual assets pose money-laundering and terrorism financing threats to the global financial system.

Eligibility for application

The FATF defines a VASP as a “person who, as a business, engages in specified activities involving virtual assets.” The Hong Kong government will now require those operating a virtual asset exchange to be designated a “virtual asset activity” under the 2018 Anti-Money Laundering and Counter-Terrorist Financing Ordinance. An individual looking to engage in the “regulated virtual asset activity” to get a  VASP license from the Securities and Futures Commission (SFC) is subject to meeting fitness and other regulatory requirements. A person will be deemed fit if they have no history of being involved in money laundering or terrorism financing. Only incorporated companies domiciled in Hong Kong or incorporated elsewhere but registered in Hong Kong may apply for a license.

Only professional investors can invest in crypto

Initially, only professional investors should be offered services from a VASP. The VASP is advised to have adequate financial resources and liquid assets. A proper corporate structure is needed, with staff with the necessary experience and knowledge to execute their duties. The VASP needs to use sound business practices to ensure client and public interests are not negatively influenced. The VASP needs to place clients’ assets in a separate corporation. The VASP has a controlling interest, has appropriate rules for determining a virtual asset’s merit before listing, creates financial reports, and prevents market manipulation. Operating an exchange in Hong Kong without a license will be considered criminal.

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