Crypto Regulations in Hong Kong in 2023

Hong Kong has emerged as a leading global destination for crypto enthusiasts, earning a reputation as one of the most attractive hubs for digital currencies. In fact, according to the latest Worldwide Crypto Readiness Report, Hong Kong was crowned the top «crypto-ready» location in 2022. It outshined other renowned crypto hotspots, such as the United States and Switzerland, in various categories, including the density of blockchain startups per 100K people and the prevalence of crypto ATMs relative to the population.

However, it could be smoother sailing for crypto entrepreneurs in Hong Kong. The city has recently implemented stringent anti-money laundering (AML) regulations that virtual asset service providers (VASPs) must adhere to operate legally.

In December 2022, the Legislative Council of Hong Kong passed an amendment to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), establishing a licensing regime for VASPs, signaling Hong Kong’s commitment to combating financial crimes in the crypto space.

Hong Kong’s new regulatory framework

Hong Kong has recently implemented a new regulatory framework for cryptocurrency, precisely in line with FATF Recommendation 15. This update to the Anti-Money Laundering Ordinance now mandates that Virtual Asset Service Providers (VASPs) comply with anti-money laundering (AML) and countering the financing of terrorism (CFT) regulations.

As per the new cryptocurrency regulations in Hong Kong, all VASPs must obtain a license from the Securities and Futures Commission (SFC). Furthermore, it is strictly prohibited for individuals or businesses to engage in the business of providing any Virtual Asset (VA) services or declare themselves as such without a valid license. This updated framework aims to strengthen the regulatory environment for cryptocurrencies and promote transparency and accountability within the industry.

Types of Virtual Assets

Hong Kong classifies virtual assets into two distinct types: security tokens and virtual goods. Security tokens are similar to securities and can be traded on exchanges, while virtual goods refer to cryptocurrencies like Bitcoin.

It’s important to note that under Hong Kong law, cryptocurrency is not recognized as a payment instrument and is not considered a valid means of payment. This distinction sets the regulatory landscape for virtual assets in Hong Kong, emphasizing the legal framework and the limitations associated with cryptocurrency transactions within the region.

Criteria for Establishing a Cryptocurrency Exchange in Hong Kong

• The entity must be registered as a legitimate company in Hong Kong;
• The entity must appoint a minimum of two Responsible Officers (ROs), with at least one being a resident of Hong Kong;
• The beneficiaries and ROs of the entity must undergo a thorough eligibility screening process;
• The company must have a comprehensive Anti-Money Laundering/Know Your Customer (AML/KYC) policy in place;
• The entity must have a sufficient amount of paid-in share capital per regulatory guidelines.

These are the prerequisites that must be met for a company to establish and operate a cryptocurrency exchange in Hong Kong. Compliance with these requirements ensures that the business operates following the regulatory framework in Hong Kong and promotes transparency, accountability, and security within the cryptocurrency ecosystem.

The Step-by-Step Process of Obtaining a Cryptocurrency License in Hong Kong

• Setting up a company and ensuring compliance with all regulatory conditions for license acquisition;
• Registering the license application with the Securities and Futures Commission (SFC);
• Completing the regulatory compliance assessment;
• Conducting thorough verification of the company’s ultimate beneficiaries (UBOs) and Responsible Officers (ROs) to ensure compliance with the regulator’s requirements;
• Upon successfully completing the above steps, the regulatory authority issues the license.

Consequences of Operating Without a License in Hong Kong

Failure to obtain the required license for operating a virtual asset (VA) business in Hong Kong can result in severe penalties. Companies may face substantial fines of up to 5,000,000 HKD (equivalent to 640,000 USD), while senior management may face imprisonment for up to seven years. Additionally, in the case of a continuing offense, a further daily fine of 100,000 HKD (equivalent to 12,700 USD) may be imposed for each day the violation persists.

The same strict repercussions apply if an unlicensed person actively promotes or markets their VA services to the Hong Kong public, even if they are provided outside of Hong Kong. Therefore, compliance with licensing requirements is crucial to avoid legal liabilities and uphold the regulatory framework for VAs in Hong Kong, ensuring that businesses operate legally and compliant.

Benefits of Obtaining a Cryptocurrency License in Hong Kong

With the introduction of cryptocurrency regulation in Hong Kong, there are advantages for companies that have registered before March 1, 2023. These registered companies are permitted to continue their operations during the transition period, which extends until December 01, 2023, or until their license application process is completed. It provides a significant advantage to established businesses in maintaining their operations without interruption during the regulatory transition period.

Registering a company now presents a unique opportunity to promptly initiate a cryptocurrency business in the dynamic Asian market and leverage the preferential licensing period in Hong Kong. By taking advantage of this favorable regulatory environment, companies can position themselves for success in the evolving cryptocurrency landscape of Hong Kong and gain a competitive edge in the region.