With the meteoric rise of cryptocurrencies over the past decade, regulators worldwide are moving swiftly to introduce legislation to govern virtual asset markets and protect investors. Following recent volatility across major crypto platforms globally, governments in Asia are also tightening oversight to manage risks effectively as demand spikes from domestic and overseas investors.

Amidst this backdrop, Hong Kong’s new crypto licensing norms signifies its ambition to be a leading global hub. The government passed the AML Bill in July 2022, laying the groundwork for increased regulation. The nation's regulator: Securities and Futures Commission’s (SFC) subsequent introduction of licences for cryptocurrency exchanges has been widely welcomed by the industry as a milestone step towards cementing Hong Kong's status as a crypto asset centre. In this article, we briefly outline the implications of Hong Kong’s evolving regulatory landscape for the cryptocurrency sector and the process for crypto firms to acquire newly mandated licences. Positioning itself proactively whilst safeguarding investor interests, Hong Kong offers significant opportunities from the institutional adoption of digital assets globally.

New licensing framework

As interest in crypto assets and Web3 technologies surges globally, Hong Kong aims to solidify its status as a regional hub for blockchain and virtual assets. With many overseas crypto firms and investors keen to tap growth opportunities, Hong Kong is strategically placed to become a top-tier global Web3 centre. Aligning with government efforts to promote financial innovation, local regulators initiated industry consultations last year on a new licensing regime for virtual asset trading platforms (VATPs).

The new framework came into effect on 1 March 2023, denoting Hong Kong's intent to move beyond AML rules and strengthen protection for crypto investors. Invoking its “Same Business, Same Risk, Same Rules” principle, the SFC stipulated comprehensive requirements for licensed entities on par with traditional financial institutions. These span secure asset custody, KYC checks, fraud prevention, market conduct, token admission criteria, accounting, auditing, risk management, conflicts of interest avoidance and cybersecurity.

By instituting a robust yet adaptable VASP licensing system, Hong Kong now has investor safeguards and controls tailored to support responsible, sustainable crypto market growth. Such decisive leadership in regulating digital assets and Web3, coupled with the city's financial heritage, makes Hong Kong well-poised to emerge as a crypto and next-generation internet powerhouse.

What are the important improvements?

As a leading financial and business hub, Hong Kong is also emerging as a centre for cryptocurrency adoption and innovation. To create a nurturing environment and prevent illicit activities, local authorities are implementing more robust regulatory oversight of crypto assets and exchanges.

The main regulator, SFC, has proposed making licensing mandatory for all virtual asset trading platforms operating in Hong Kong. Additional restrictions are also forthcoming to better safeguard users.

Notably, the government expanded the jurisdiction of an AML/CTF laws in 2022 to include oversight of VASPs like exchanges, wallets, and other crypto platforms. Under enhanced due diligence requirements, VASPs must implement policies for identifying and reporting suspicious transactions, assessing risks, training employees on compliance and maintaining thorough customer records.

With ample protections in place, licensed exchanges may be permitted to serve retail investors, pending SFC approval. Stakeholders caution that overregulation could adversely redirect local retail activity to unregulated overseas entities. Hence, authorities are deliberate about crafting balanced, “supervisory effective” rules that allow responsible innovation alongside user security.

New measures apply specifically to institutional market participants and VASPs rather than retail traders directly. While evaluating retail access to licensed platforms, the SFC also retains discretion over which crypto-assets can be traded by regulated entities. By proactively addressing emerging issues, Hong Kong is pioneering pragmatic crypto regulations to safeguard financial stability while supporting the sustainable growth of token markets.

How will the new regulatory regime affect the industry?

Hong Kong's recently introduced cryptocurrency regulations are set to bring many benefits through greater transparency and accountability.

The licensing regime and stricter AML/CFT supervision increase the credibility of local crypto platforms among external institutional investors. This is encouraging an influx of capital and know-how from overseas companies looking to set up crypto businesses in Hong Kong. Crypto firms that achieve compliance can thus expand offerings and operations, creating additional employment opportunities.

Additionally, improved integrity and oversight of cryptocurrency transactions under the SFC's “Same Business, Same Risks, Same Rules” approach will reduce fraud risks. By prioritizing investor protection and market integrity, regulators have balanced the interests of user safety with industry innovation. In the long term, institutionalizing sound cryptocurrency governance practices will contribute to the sustainable growth of the ecosystem.

Stringent checks to safeguard investors

The government enforces exacting standards upon applicants seeking cryptocurrency exchange licences in Hong Kong under the new regulatory regime. As outlined in the Legislative Council’s assessment, the SFC mandates comprehensive protections akin to those governing traditional financial institutions.

Among other prudent safeguards, VASPs must demonstrate:

  • Robust corporate governance frameworks and organisational structures, with competent, ethical leadership.
  • Detailed policies for risk management along with adequate measures to ensure market integrity and counter manipulation.

Sufficient financial resources to achieve min. capital requirements.

Initially, licensed VASPs may only provide services to professional investors during the regime’s introductory phase. By applying these requirements scalable, the SFC retains flexibility to enhance oversight as needed without extensive legal amendments.

The SFC, along with the HKMA, also issued a Circular delineating a differentiated approach towards regulating various crypto asset activities. These include digital token offerings, crypto-related investments, advisory, and intermediation services. With certain exceptions, providers must evaluate clients’ product knowledge and investment sophistication beforehand. Exemptions apply to select exchange-traded products and public digital asset funds preapproved for retail distribution per relevant jurisdiction rules.

By entrenching judicious checks around licensing, disclosure and sales practices, Hong Kong’s gradualist attempts at crypto governance emphasize investor protection alongside market growth.

Regulator's broader supervision and enforcement powers

The SFC possess expansive oversight and punitive capabilities to ensure licensed VASPs compliance. These encompass wide-ranging competencies to:

  • Conduct routine and investigative inspections of licensed VASPs’ premises and partners to examine documents.
  • Probe potential legal or regulatory breaches.
  • Impose administrative sanctions like mandate corrective actions, suspend licences and prohibit activities contravening governance standards.

Upon identifying violations, the SFC can also apply fines of around USD 645,000 plus potential imprisonment up to 7 years. For ongoing non-adherence, supplementary daily penalties up to nearly USD 13,000 may apply. The same will confront unlicensed parties illegally providing crypto exchange services locally or promoting unregulated offshore platforms.

By formalizing intensive compliance checks rather than solely relying on self-regulation, these instruments reinforce accountability around licensed VASPs managing risks, safeguarding clients and meeting conduct obligations. As an adjunct to market development policies in effect, they balance financial stability with sector growth — cementing Hong Kong’s position as a rules-based blockchain hub with high governance standards.

Prerequisites for obtaining a crypto licence

In Hong Kong, applicants are subject to a comprehensive set of compliance requirements mandated by the SFC. These requirements extend to the scrutiny of the applicant entity itself, as well as its responsible officers (ROs), directors, and ultimate beneficial owners.

Upon successful approval, the licensed VASP is obligated to appoint a min. of two accountable officers who will oversee day-to-day operations and ensure adherence to regulatory standards. Additionally, the following criteria must be met:

Details

At least one RO must hold the position of an executive director on the VASP’s board.

In cases where there are multiple executive directors within the applicant entity, all such directors must be designated as RO.

A min. of one RO must be a permanent resident of Hong Kong.

VASP licence applicants must either be Hong Kong-incorporated companies with local premises or overseas corporations with branches established in Hong Kong.

Partnerships, individuals, and foreign entities lacking a legal presence in Hong Kong are ineligible to apply for the VASP licence.

By satisfying the SFC’s stringent fit and proper criteria for licensed VASPs, applicants enhance confidence in their governance structures and contribute to the promotion of ethical crypto-asset commerce within the framework of the new compliance regime.

Transition period incentivizes swift licensing

Crypto-related company in Hong Kong’s until February 29th could use a transitional grace period. Today, any novel crypto-related business planning Hong Kong market entry must secure full regulatory compliance prerequisites before commencing activities. Since March 2024, no longer possible to keep systems running whilst awaiting licence decisions.

Establishing a Hong Kong-based crypto asset firm can tap Asia-Pacific’s surging virtual currency adoption, whilst making the most of the SFC’s licensing pros.

Our company's subject-matter experts can provide you detailed information about publication during a consultation on the regulation of cryptocurrency activities in Hong Kong.

In addition, we can help crypto companies register and get licences in Asian countries and Europe. We also offer consultations.