CMS Expert Guide to Crypto Regulation in Hong Kong

The Anti-Money Laundering and Counter Terrorist Financing Ordinance (Cap. 615) (“AMLO”) is the primary legislation which regulates customer due diligence and record keeping requirements.

Although the AMLO does not specifically provide regulations in respect of crypto assets, the SFC has published licensing conditions with regard to virtual assets trading platforms (“VATP”) which cover AML/CTF guidance and requirements.

Earlier this year, the Financial Services and the Treasury Bureau (“FSTB”) proposed to expand the AMLO to regulate providers of virtual asset (“VA”) over-the-counter (“OTC”) trading services. The goal here is to align OTC regulatory compliance with the VATP licensing regime, meaning operators with physical outlets or digital platforms for VA spot trading in Hong Kong will need to be licensed under the expanded AMLO.

The nature and characteristics of the crypto asset and the services provided will affect the applicable regulations.

For example, if the crypto asset contains characteristics of a security as defined under the Securities and Futures Ordinance (Cap. 571) (“SFO”), it will be regulated by the Securities and Futures Commission (“SFC”) and other relevant laws and regulations.

Furthermore, a SFC license is required for all centralised VATP exchanges.

The SFC encourages VATP operators to apply for dual licences under the SFO and VATP regimes to cover their trading of security and non-security assets.

Earlier this year, the Hong Kong Monetary Authority (“HKMA”) issued a circular that outlined its expectations for authorised institutions operating under the Banking Ordinance (Cap. 155). The circular addressed the growing interest of these institutions in providing custodial services for virtual assets and emphasised the need for adequate safeguards and risk management.

Currently, the only virtual asset services regulated under the AMLO are in relation to the operation of a VATP, OTC services and lending as outlined above. 

NFTs are not currently regulated, as long as the NFT itself does not fall within the definition of “securities” or “collective investment scheme” under the ambit of the SFO and the purview of the SFC.

Following the issuance of the circular on SFC-authorised funds with exposure to virtual assets by the SFC in December 2023, Hong Kong has just had its first ETFs listed which invest directly in VAs tokens (such as bitcoin and ether).

For borrowing/lending, as mentioned in Q1 above, the HKMA recently issued expectations for authorised institutions acting as intermediaries, distributing tokenized products and providing standalone custodial services. 

The circular set out numerous expectations for authorised institutions, including conducting risk assessments and establishing policies to mitigate risks before offering virtual asset custodial services.

Limitations and requirements will depend on the specific licence being applied for.

Regarding the VATP licence, additional guidance has been issued by the SFC in relation to compliance with AML regulations.

VATPs must promptly prepare and submit their license applications and refrain from claiming to be licensed until approved by the SFC.

The SFC may impose additional conditions on the VATP licensee if the licence is granted. These conditions may relate to risk management, anti-money laundering or anti-terrorism financial policies and procedures, financial resources, cybersecurity and other elements listed in Section 53ZRK of the AMLO.

Various financial regulators have issued guidance in respect of crypto assets including the SFC, the Hong Kong Monetary Authority and the Insurance Authority.

VATPs are required to comply with the Travel Rule which provides fundamental information for carrying out sanctions screening and transaction monitoring, as well as other risk mitigation measures.

Under the Travel Rule, VATPs shall (i) when acting as an ordering institution, obtain, record and submit the required information of the originator and recipient to the beneficiary institution; and (ii) when acting as a beneficiary institution, obtain and record the required information submitted by the ordering institution or intermediary institution.