Hong Kong tightens exchange regulations with proposed rules

  • The Hong Kong government has suggested a new exchange licencing framework.
  • Only professional investors’ products may be offered on exchanges.
  • Who is qualified for a licence must meet stringent criteria.

Hong Kong’s crypto exchanges may be in for a bumpy ride, as rigorous new licencing restrictions drastically limit the number of clients exchanges can have.

In Hong Kong, the writing is on the wall for crypto exchanges. Okay, maybe not, but Hong Kong’s government is attempting to regulate the cryptocurrency business. The number of crypto exchanges in Hong Kong is the most plentiful representation of the crypto sector in the region. A new licencing framework has been proposed by the government. This is in response to the requirements set forth by the Financial Action Task Force, which are outlined in 40 Recommendations and 11 immediate results. Hong Kong has been a member of the FATF for more than three decades. The FATF published a report in 2019 praising Hong Kong’s system for combatting money laundering and terrorism financing (MLTF).

The FATF has now modified its criteria to require virtual asset service providers (VASPs) to adhere to the same anti-money laundering and counter-terrorism financing (AML/CTF) regulations as financial institutions and non-financial businesses and professions. The FATF’s amendments have been included into Hong Kong’s new licencing regime. The Hong Kong government feels that the anonymity and decentralisation of virtual assets constitute a threat to the global financial system in terms of money laundering and terrorism financing.


Application eligibility

A VASP is a “person who, as a business, engages in specified activities involving virtual assets,” according to the FATF. Under the 2018 Anti-Money Laundering and Counter-Terrorist Financing Ordinance, those operating a virtual asset exchange will henceforth be required to be classified as a “virtual asset activity.” A person seeking a VASP licence from the Securities and Futures Commission (SFC) must meet fitness and other regulatory standards before engaging in “controlled virtual asset activity.” If a person has no history of money laundering or terrorism financing, they will be considered fit. Only Hong Kong-incorporated firms or corporations incorporated elsewhere but registered in Hong Kong are eligible to apply for a licence.


Crypto is only available to professional investors

Only professional investors should be offered VASP services at first. It is recommended that the VASP have sufficient financial resources and liquid assets. A solid corporate structure is required, as well as employees who have the requisite expertise and skills to carry out their responsibilities. To guarantee that client and public interests are not harmed, the VASP must follow solid business procedures. Client assets must be placed in a separate corporation by the VASP. The VASP owns a controlling stake in the company, has established proper procedures for establishing a virtual asset’s worth prior to listing, generates financial reports, and guards against market manipulation. It will be illegal to operate an exchange in Hong Kong without a licence.


Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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