Op-ed: How Hong Kong’s stricter crypto laws goal to spice up investor confidence

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The next is a visitor put up from Anndy Lian.

Hong Kong has been a serious monetary hub for a few years, and in recent times, it has proven rising curiosity in blockchain and cryptocurrency applied sciences. The federal government of Hong Kong has indicated its assist for the trade’s improvement, and lots of initiatives are underway to assist create a positive atmosphere for crypto and blockchain companies.

Hong Kong has a well-established regulatory framework for monetary providers, which has helped entice many crypto and blockchain firms. The Hong Kong Financial Authority (HKMA) has launched a number of initiatives to assist the event of blockchain and digital currencies. For instance, the HKMA is engaged on creating a central financial institution digital foreign money (CBDC), and has additionally launched a blockchain-based commerce finance platform.

Many energetic blockchain and cryptocurrency communities in Hong Kong present assist and sources for companies and builders within the trade. Many occasions and conferences associated to blockchain and cryptocurrency within the metropolis assist create networking alternatives and promote the trade’s progress.

In December 2022, the Legislative Council of Hong Kong handed an modification to the Anti-Cash Laundering and Counter-Terrorist Financing Ordinance (AMLO), introducing a licensing regime for digital asset service suppliers (VASPs).

Hong Kong’s New Regulatory Framework

Hong Kong has just lately carried out new regulatory frameworks for cryptocurrency buying and selling and providers. The up to date Anti-Cash Laundering Ordinance is according to the Monetary Motion Activity Drive (FATF) Suggestion 15, which requires digital asset service suppliers (VASPs) to stick to anti-money laundering (AML) and countering the financing of terrorism (CFT) laws.

The brand new laws require all VASPs working in Hong Kong to acquire a license from the Securities and Futures Fee (SFC). With no license, people and companies can’t supply VA providers or declare themselves as a supplier.

The Hong Kong authorities intently regulates all actions associated to the availability of digital asset (VA) providers. The time period “VA services” encompasses a broad vary of digital providers that embody, however will not be restricted to:

(a) Providing digital belongings on the market or buy often, leading to a binding transaction; often introducing or figuring out individuals to different events with the aim of negotiating or concluding digital asset transactions which are binding or with the cheap expectation of doing so;(b) Possessing direct or oblique management over shopper cash or shopper digital belongings within the provision of such providers.

It is very important notice that crypto buying and selling platforms that permit buying and selling in monetary merchandise equivalent to securities and futures contracts will not be topic to the brand new licensing regime, as they’re already regulated underneath the Securities and Futures Ordinance. One other factor to notice is that the brand new licensing necessities lengthen to all crypto exchanges registered in Hong Kong underneath the Firms Ordinance, together with these primarily based exterior of Hong Kong that actively goal Hong Kong residents of their advertising and marketing efforts.

Prohibition on Unlicensed VA Service Suppliers

The amended Ordinance additionally prohibits unlicensed individuals from performing regulated capabilities associated to the enterprise of offering VA providers. Such capabilities could embody the shopping for or promoting of digital belongings, managing digital asset portfolios, and offering digital asset custodian providers.

Unlicensed people or companies can’t promote VA providers in Hong Kong. The SFC can take enforcement actions towards unlicensed entities, together with issuing fines and revoking licenses.

Influence on VASPs

The brand new laws have important implications for VASPs working in Hong Kong. The licensing course of is rigorous and requires VASPs to show compliance with AML/CFT necessities. Licensed VASPs are topic to ongoing supervision and monitoring by the SFC.

The licensing course of requires VASPs to offer detailed enterprise info, together with possession construction, administration crew, and danger administration techniques. VASPs should additionally conduct buyer due diligence and transaction monitoring to detect and report suspicious actions.

VASPs that fail to adjust to the regulatory necessities could face extreme penalties, together with fines, license revocation, and reputational injury. The laws goal to advertise a secure and steady digital asset market in Hong Kong and shield the pursuits of traders and shoppers.

Advantages of the New Regulatory Framework

The brand new regulatory framework for digital asset providers in Hong Kong has a number of advantages for VASPs and traders. Firstly, the laws present readability and certainty concerning the authorized and regulatory atmosphere for digital asset providers in Hong Kong. This readability can assist entice extra traders and companies to the market.

Secondly, the laws promote transparency and accountability within the digital asset market. Licensed VASPs should keep correct information, conduct common audits, and report suspicious actions to the related authorities. These necessities can assist deter fraud and different illicit actions out there.

Thirdly, the laws assist promote a stage taking part in subject for all VASPs working in Hong Kong. The licensing course of ensures that every one VASPs meet the identical excessive requirements and are topic to the identical regulatory necessities. This can assist create a extra aggressive and truthful marketplace for digital asset providers in Hong Kong.

How to get the license?

Crypto companies should get hold of a license from the Securities and Futures Fee, the regulatory physique for securities and futures markets. To get a license, the enterprise should move a ‘fit and proper’ check that includes prison background checks, AML/CFT efficiency historical past, monetary standing, academic or different {qualifications}, popularity, expertise, character, reliability and monetary integrity of the particular person. The enterprise should additionally apply for approval of the premises to maintain information or paperwork required underneath the Ordinance. Moreover, every director of the applicant and the last word proprietor should be decided as ‘fit and proper’ to be related to offering the VA service.

To satisfy the regulatory necessities of the brand new Ordinance, licensed crypto companies should introduce AML/CTF measures, together with buyer due diligence, transaction monitoring and record-keeping, screening shoppers towards worldwide sanctions and watchlists for PEP standing, and screening shoppers in opposed media. They have to additionally adjust to Journey Rule necessities and appoint an eligible auditor inside one month after turning into a licensed supplier. Moreover, they need to put together monetary statements and different paperwork for prescribed intervals and submit them with the auditor’s report back to the Fee inside 4 months after the tip of the monetary yr to which they relate.

The licensed supplier should additionally submit an annual return to the Fee and pay a prescribed price inside one month after every anniversary of the license’s grant date. Lastly, the licensed particular person should notify the Fee in writing of any change in info that the licensed particular person or final proprietor has offered underneath the necessities of the Ordinance, together with meant cessation of enterprise or intention to vary the tackle at which it proposes to offer any VA service.

Remaining phrases

The SFC may have broad powers to oversee AML/CTF and regulatory compliance by licensed VASPs, together with imposing sanctions. Companies that function and not using a license or violate AML guidelines can face important fines and imprisonment for senior administration. Within the case of fraudulent actions or deception involving digital belongings, fines can attain as much as 10,000,000 HKD (1,277,000 USD) and imprisonment for as much as 10 years.

The brand new laws will come into impact on April 1, 2023. Some provisions, together with licensing necessities, will go into impact on June 1, 2023. Companies are suggested to start out getting ready for the brand new laws as quickly as attainable and reviewing their AML/CTF insurance policies and controls to establish potential gaps within the necessities.

General, implementing these new laws is anticipated to draw extra institutional traders to the Hong Kong cryptocurrency market, as they’ll have higher confidence within the security and legitimacy of the trade. The transfer additionally brings Hong Kong’s cryptocurrency laws according to international requirements and greatest practices.

Hong Kong has skilled important occasions since 2019 which have had a serious impression on town and its individuals. Hong Kong has confronted many challenges, from protests and political unrest to the COVID-19 pandemic to the introduction of nationwide safety regulation and political modifications. I hope town’s new crypto agenda pushes a vital step ahead. By embracing the alternatives of recent applied sciences, defending traders, and selling transparency, Hong Kong can proceed to be a frontrunner within the international monetary trade.

Some “#AnndyLian Food for Thought” earlier than I finish this text:

The Japanese authorities acknowledged early on that permitting retail traders to take part within the cryptocurrency market may assist drive adoption and promote innovation. My query is: “Will Hong Kong follow Japan’s approach to allowing retail investors to trade cryptocurrencies in a regulated environment?”

This may very well be one in all their promoting factors. I’m keen to search out out.

Posted In: Hong Kong, Regulation

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