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The joint circular from the Hong Kong regulators outlines updates to their policies for the virtual assets industry. The guidance clarifies the need for exchanges to opt in to the VASP regime to work with broking intermediaries and is likely to convince more exchanges to follow that route.
In 2019, the SFC created a new regime for virtual asset service providers (VASPs), effectively allowing cryptocurrency exchanges to opt in to regulation, by listing at least one security token on their platform and thereby bringing themselves within scope of existing security regulation. In doing so, the exchange would also be expected to abide by a wide range of additional requirements, aimed at safeguarding both the securities and traditional cryptocurrency business. The response has been muted to say the least – to date we are only aware of one cryptocurrency exchange who has opted in to the regime.
In 2021, the Hong Kong government set out its vision for the regulation of VASPs. The consultation conclusions set out a new licensing regime for VASPs, based purely around AML/CTF supervision. The implementation of this regime would align Hong Kong to other jurisdictions which have adopted similar ‘AML/CTF-only’ regimes for VAs, such as the UK and EU, based on the updated FATF Standard. This new regime is expected to be introduced under the current legislative session, although there is no further word on progress at the time of writing.
However, intermediaries hoping that the arrival of the AML/CTF regime would allow them to begin offering broking services in cryptocurrencies have now had their hopes dashed.
The SFC and HKMA released their Joint circular on intermediaries’ virtual asset-related activities on 28th January. The circular makes it clear that AML/CTF only supervision does not address all of its concerns, citing specifically client asset protection, insurance and fraud risks. As such, intermediaries will only be allowed to offer broking arrangements to exchanges who have opted in to the SFCs more extensive VASP regime – again currently just one firm.
With this development in mind, it seems likely that more exchanges will weigh the possibility of opting in to the regime. The ability to access a broader pool of investors via broking intermediaries will surely be attractive, particularly as the pool of license holders able to offer such exchange services is likely to remain small for the time being. However, doing so will likely require such exchanges to make significant investments in their compliance arrangements, to satisfy the SFCs requirements.
Additional considerations for virtual asset businesses
In addition to the restrictions around intermediary activity, the SFC circular also includes:
- A reiteration of the SFC’s position on the risks associated with VAs, and the limitation of their sale to professional investors. The only exception is a small range of exchange-traded products, which would still be considered complex.
- The introduction of a virtual asset knowledge test – to ensure investors have appropriate knowledge and experience before being offered virtual asset products.
- Limiting virtual assets advisory to existing type 1 and type 4 clients, with a requirement that licensed firms follow all regulatory requirements for regulated advisory business when advising on VAs
How Ocorian can help
The global regulatory landscape for virtual assets is complex and fast moving. We can help you to:
- Understand your obligations, both in the jurisdiction in which you are based, and where your clients are based
- Determine how the new SFC business applies to your existing business, or ambition in the VA space
- Assist with seeking a license as a VASP
- Devise appropriate policies and procedures to govern your VA business
