Hong Kong to align crypto regulatory framework with FATF standards
06 Nov 2020

Hong Kong’s government has launched a consultation on legislative proposals to enhance the city’s AML/CTF regime, including through the introduction of a new licensing regime for VASPs (virtual asset services providers) that are currently unregulated.

“The legislative proposals are intended to bring Hong Kong’s regulatory regime up to date in line with the latest international requirements, as promulgated by the Financial Action Task Force (FATF),” reads an official statement, adding that the proposals will uphold the city’s credibility as a trusted and competitive place to invest and do business.

The consultation followed a keynote address from SFC (Securities and Futures Commission) chief Ashley Alder earlier in the day at Hong Kong Fintech Week, in which he explained that the “opt-in” regulatory framework for VASPs announced last year presents a “significant limitation” because it is restricted to platforms trading security tokens or a mixture of security and non-security tokens.

“Under the current legislative framework, if a platform operator is really determined to operate completely off the regulatory radar it can do so simply by ensuring that its traded crypto assets are not within the legal definition of a security,” Alder said.

To align with FATF requirements, the government is proposing to widen the supervisory net to cover centralised trading platforms that only trade non-security tokens, where the SFC will be empowered to license and supervise such platforms.

Licensing under the new regime will be similar to the existing regime and include requirements for platforms to initially only offer services to professional investors, properly segregate client assets, ensure wallet keys are properly managed, and have in place measures to deal with possible market manipulation – among other requirements.

“Once this new regime is in place all virtual asset trading platforms in Hong Kong would be regulated supervised and monitored,” Alder said. “If they’re operating in Hong Kong, or target Hong Kong investors, they would need to apply for an SFC license. Failure to do so would of course be an offence.”

“The SFC would have the ability to assess license applications, ensure compliance monitor the firm’s daily operations, investigate any irregularities and enforce the rules.”

The existing and new regimes will work in parallel: platforms that trade security tokens or a mixture of security and non-security tokens will continue to be regulated under the existing regime; and platforms that trade only non-security tokens will be regulated under the new regime.

So far, only one platform, OSL Digital Securities, has been granted ‘in-principle approval‘ to operate a virtual asset trading platform in Hong Kong under the existing regime.

Other amendments

The consultation also proposes to introduce a registration regime for dealers in precious metals, precious stones, precious products, or precious-asset-based instruments.

By Manesh Samtani, Regulation Asia, 4 November 2020

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