How Hong Kong’s stricter crypto rules purpose to spice up investor confidence

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The next is a visitor publish from Anndy Lian.

Hong Kong has been a significant monetary hub for a few years, and lately, it has proven rising curiosity in blockchain and cryptocurrency applied sciences. The federal government of Hong Kong has indicated its help for the business’s growth, and plenty of initiatives are underway to assist create a good atmosphere for crypto and blockchain companies.

Hong Kong has a well-established regulatory framework for monetary providers, which has helped entice many crypto and blockchain corporations. The Hong Kong Financial Authority (HKMA) has launched a number of initiatives to help the event of blockchain and digital currencies. For instance, the HKMA is engaged on growing a central financial institution digital foreign money (CBDC), and has additionally launched a blockchain-based commerce finance platform.

Many energetic blockchain and cryptocurrency communities in Hong Kong present help and sources for companies and builders within the business. Many occasions and conferences associated to blockchain and cryptocurrency within the metropolis assist create networking alternatives and promote the business’s progress.

In December 2022, the Legislative Council of Hong Kong handed an modification to the Anti-Cash Laundering and Counter-Terrorist Financing Ordinance (AMLO), introducing a licensing regime for digital asset service suppliers (VASPs).

Hong Kong’s New Regulatory Framework

Hong Kong has lately applied new regulatory frameworks for cryptocurrency buying and selling and providers. The up to date Anti-Cash Laundering Ordinance is in keeping with the Monetary Motion Process Drive (FATF) Suggestion 15, which requires digital asset service suppliers (VASPs) to stick to anti-money laundering (AML) and countering the financing of terrorism (CFT) rules.

The brand new rules require all VASPs working in Hong Kong to acquire a license from the Securities and Futures Fee (SFC). With no license, people and companies can not provide VA providers or declare themselves as a supplier.

The Hong Kong authorities carefully regulates all actions associated to the supply of digital asset (VA) providers. The time period “VA providers” encompasses a broad vary of digital providers that embody, however will not be restricted to:

  • (a) Providing digital belongings on the market or buy repeatedly, leading to a binding transaction; repeatedly introducing or figuring out individuals to different events with the aim of negotiating or concluding digital asset transactions which might be binding or with the cheap expectation of doing so;
  • (b) Possessing direct or oblique management over consumer cash or consumer digital belongings within the provision of such providers.

It is very important word that crypto buying and selling platforms that permit buying and selling in monetary merchandise similar to securities and futures contracts will not be topic to the brand new licensing regime, as they’re already regulated beneath the Securities and Futures Ordinance. One other factor to notice is that the brand new licensing necessities prolong to all crypto exchanges registered in Hong Kong beneath the Corporations Ordinance, together with these primarily based exterior of Hong Kong that actively goal Hong Kong residents of their advertising efforts.

Prohibition on Unlicensed VA Service Suppliers

The amended Ordinance additionally prohibits unlicensed individuals from performing regulated capabilities associated to the enterprise of offering VA providers. Such capabilities could embody the shopping for or promoting of digital belongings, managing digital asset portfolios, and offering digital asset custodian providers.

Unlicensed people or companies can not promote VA providers in Hong Kong. The SFC can take enforcement actions in opposition to unlicensed entities, together with issuing fines and revoking licenses.

Affect on VASPs

The brand new rules have important implications for VASPs working in Hong Kong. The licensing course of is rigorous and requires VASPs to display compliance with AML/CFT necessities. Licensed VASPs are topic to ongoing supervision and monitoring by the SFC.

The licensing course of requires VASPs to offer detailed enterprise data, together with possession construction, administration workforce, and danger administration methods. VASPs should additionally conduct buyer due diligence and transaction monitoring to detect and report suspicious actions.

VASPs that fail to adjust to the regulatory necessities could face extreme penalties, together with fines, license revocation, and reputational injury. The rules purpose to advertise a secure and secure digital asset market in Hong Kong and defend the pursuits of buyers and shoppers.

Advantages of the New Regulatory Framework

The brand new regulatory framework for digital asset providers in Hong Kong has a number of advantages for VASPs and buyers. Firstly, the rules present readability and certainty concerning the authorized and regulatory atmosphere for digital asset providers in Hong Kong. This readability might help entice extra buyers and companies to the market.

Secondly, the rules promote transparency and accountability within the digital asset market. Licensed VASPs should preserve correct data, conduct common audits, and report suspicious actions to the related authorities. These necessities might help deter fraud and different illicit actions available in the market.

Thirdly, the rules assist promote a degree taking part in discipline for all VASPs working in Hong Kong. The licensing course of ensures that each one VASPs meet the identical excessive requirements and are topic to the identical regulatory necessities. This might help create a extra aggressive and truthful marketplace for digital asset providers in Hong Kong.

Easy methods to get the license?

Crypto companies should get hold of a license from the Securities and Futures Fee, the regulatory physique for securities and futures markets. To get a license, the enterprise should go a ‘match and correct’ check that entails legal background checks, AML/CFT efficiency historical past, monetary standing, instructional or different {qualifications}, repute, expertise, character, reliability and monetary integrity of the individual. The enterprise should additionally apply for approval of the premises to maintain data or paperwork required beneath the Ordinance. Moreover, every director of the applicant and the last word proprietor should be decided as ‘match and correct’ to be related to offering the VA service.

To satisfy the regulatory necessities of the brand new Ordinance, licensed crypto companies should introduce AML/CTF measures, together with buyer due diligence, transaction monitoring and record-keeping, screening shoppers in opposition to worldwide sanctions and watchlists for PEP standing, and screening shoppers in antagonistic media. They need to additionally adjust to Journey Rule necessities and appoint an eligible auditor inside one month after changing into a licensed supplier. Moreover, they need to put together monetary statements and different paperwork for prescribed intervals and submit them with the auditor’s report back to the Fee inside 4 months after the top of the monetary yr to which they relate.

The licensed supplier should additionally submit an annual return to the Fee and pay a prescribed price inside one month after every anniversary of the license’s grant date. Lastly, the licensed individual should notify the Fee in writing of any change in data that the licensed individual or final proprietor has supplied beneath the necessities of the Ordinance, together with meant cessation of enterprise or intention to alter the tackle at which it proposes to offer any VA service.

Remaining phrases

The SFC can have broad powers to oversee AML/CTF and regulatory compliance by licensed VASPs, together with imposing sanctions. Companies that function and not using a license or violate AML guidelines can face important fines and imprisonment for senior administration. Within the case of fraudulent actions or deception involving digital belongings, fines can attain as much as 10,000,000 HKD (1,277,000 USD) and imprisonment for as much as 10 years.

The brand new rules will come into impact on April 1, 2023. Some provisions, together with licensing necessities, will go into impact on June 1, 2023. Companies are suggested to begin getting ready for the brand new rules as quickly as attainable and reviewing their AML/CTF insurance policies and controls to establish potential gaps within the necessities.

General, implementing these new rules is predicted to draw extra institutional buyers to the Hong Kong cryptocurrency market, as they are going to have higher confidence within the security and legitimacy of the business. The transfer additionally brings Hong Kong’s cryptocurrency rules in keeping with world requirements and finest practices.

Hong Kong has skilled important occasions since 2019 which have had a significant affect on town and its individuals. Hong Kong has confronted many challenges, from protests and political unrest to the COVID-19 pandemic to the introduction of nationwide safety regulation and political adjustments. I hope town’s new crypto agenda pushes a important step ahead. By embracing the alternatives of latest applied sciences, defending buyers, and selling transparency, Hong Kong can proceed to be a frontrunner within the world monetary business.

Some “#AnndyLian Meals for Thought” earlier than I finish this text:

The Japanese authorities acknowledged early on that permitting retail buyers to take part within the cryptocurrency market might assist drive adoption and promote innovation. My query is: “Will Hong Kong observe Japan’s method to permitting retail buyers to commerce cryptocurrencies in a regulated atmosphere?”

This could possibly be certainly one of their promoting factors. I’m keen to search out out.

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