Urszula McCormack, Evan Manolios and Jack McNally give virtual asset service providers (VASPs) the low down on operating beyond June 1 in Hong Kong under a strict new regime.
For nearly three years, KWM’s global fintech and blockchain team has exploded client inboxes with alerts on Hong Kong’s keenly awaited Virtual Asset Licensing Regime (VA Licensing Regime).
For good reason. Operators of virtual exchange platforms in Hong Kong must take advantage of transitional arrangements if they want to continue to operate post 1 June 2023.
The big day is near: the VA Licensing Regime kicks in on 1 June 2023.
- We were there when the Financial Services and Treasury Bureau published its consultation conclusions on the licensing of virtual asset exchanges.
- We geeked out when the framework for the VA Licensing Regime was published in a draft bill to amend the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (AMLO).
- We brought you key takeaways when the draft bill became law.
- We took you on a deep dive into the Securities and Futures Commission’s consultation paper on the VA Licensing Regime.
- We’ve waxed lyrical about what you need to know in the lead-up to the VA Licensing Regime going live.
- We’ve advised clients on what they need to do to ensure they can continue operating their virtual asset trading platforms while applying for a license under the VA Licensing Regime. This means ensuring eligibility for the transitional arrangements.
So – are you eligible? Here’s our short form checklist: our Friday freebie to help track your progress against the eligibility requirements.
If you need any assistance in taking advantage of the transitional arrangements or otherwise preparing for the VA Licensing Regime to kick in, we’re more than happy to help. Please get in touch!
Important!
The table below serves as a high-level overview only. It is not intended set out the complete transition arrangements or underlying requirements. We also caution that certain aspects of the VA Licensing Regime remain in draft. The final version is imminent – but who can wait?
A note on other activities. No transitional protection applies to other regulated activities, such as dealing in security tokens, derivatives or futures contracts. This means that such business lines must not be carried on or marketed without a licence or under an appropriate exemption. A local presence can also make provision of such services via an offshore reverse-enquiry basis far more challenging if not impossible practically. We can discuss controls and licensing with you separately.
Capitalised terms have the meaning of terms in the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), unless stated otherwise.
That’s the disclaimer done. Keeping that in mind: onto the checklist!
| The questions you need to answer for eligibility | Why does it matter? | |
| Have you incorporated and/or selected a company that will act as the corporation applicant to the VASP Regime and provide VA Services to Hong Kong customers (Company)? | This should be the entity that will operate the exchange in Hong Kong.
All licensees must be either a Hong Kong incorporated company or registered as a non-Hong Kong company with the Companies Registry of Hong Kong. |
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| Is the VA Exchange live and made available to persons in Hong Kong? | This is relevant to satisfying the requirement that the Company is “carrying on a business in Hong Kong” and the expectations of the SFC for transitional eligibility.
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| Does the Company have customers onboarded in Hong Kong? | ||
| Does the Company have a physical office in Hong Kong? | ||
| Does the Company’s Hong Kong staff have central management and control over the VA trading platform? | ||
| Are VA Service-related contracts in place between Hong Kong customers and the Company? | This is an important factor to demonstrate that the VA Services are provided by the Company as the corporate applicant to the VASP Regime. If the VA Service is not provided by the Company, you will need to consider whether any variations or transfers of relationships and data need to be obtained. Appropriate lead times to make changes to any terms and conditions need to be considered. | |
| Are any necessary inter-company service agreements in place? | ||
| Does the Company provide VA Services in a manner that satisfies the fit and proper requirements in Parts II and III of the currently proposed VATP Guidelines?[1] | ||
| Are the Company’s VA Services significant enough to be “meaningful”, with a “substantial presence”? | This involves assessing the extent of the VA Service for example, how many Hong Kong customers the Company has, what are the trading volumes, how many Hong Kong staff does the Company have? | |
| Has the Company obtained or updated its a Business Registration Certificate? | This is relevant to satisfying the requirement that the Company is “carrying on a business in Hong Kong”.
The description of the business should reflect its role as a VA Exchange. A change may not be required if this is already sufficiently descriptive. |
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| Personnel requirements | ||
| Has the Company appointed 2 or more responsible officers that satisfy the VATP Guideline competence requirements (“Proposed ROs”)? | ||
| Have the Proposed ROs been providing VA Services in Hong Kong, and will be they be doing to immediately before 1 June 2023? | The ROs do not need to have been providing VA Services for the Company itself, but they must be provided in Hong Kong. | |
| Will the Proposed ROs be physically in Hong Kong immediately before 1 June 2023? | All ROs need to satisfy this requirement even if one RO is generally offshore. | |
| Authorisations and documentation | ||
| Has the Company taken steps to obtain applicable internal authorisations / approvals in respect of the above items? | For example, obtain any and all Board resolutions. | |
| Has the Company notified / obtained the necessary approvals from any other applicable foreign regulators or group entities to carry out Hong Kong activities? | Some foreign licensing regimes may require notification or approval before new activities and expansions are undertaken.
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| Has the Company retained records to demonstrate satisfaction of the above (where applicable)? | This is relevant to the provision of a confirmation that is required to be provided to the SFC at the lodgement of the licensing application. | |
| Other key actions | ||
| Has the Company secured a banking partner in respect of the VA Services? | These are not strictly an item needed to be eligibility for the transition arrangements, but they will affect the ability to provide a VA Service and can take time.
The HKMA has helpfully published positive guidance to the banking sector on a risk-based approach to banking the VA sector. However, be well-prepared.
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| Has the Company secured insurance or a banking partner for its compensation funding arrangements? | ||
| Has the Company secured one or more consultants to assist with third party assessments including the External Assessment Reports, audit reports and legal opinions? | ||
| Has the Company incorporated and otherwise set up an Associated Entity to hold client assets? Has the Associated Entity applied for a “trust or company service” provider licence? | ||
What else do I need to line up now?
So you’re all set for transitional protection. What else do you need to do?
Well, a lot.
You have 9 months to apply to retain the benefits of that transitional protection, following which (all things going well) you will be deemed licenced and then granted a full licence. Applications need to be of a very high quality and policies, procedures and systems need to be of a very high standard.
The key things you’ll need are:
Some of these may be possible to do once the application has been lodged – but leaving it too late presents very poorly.
Not caught by the regime? Not so fast!
Be prepared to explain why. In particular, your banking and payments partners and regulators may well ask, “if not, why not”. We are supporting several crypto industry players on formal opinions.
A final note
This is not a “light touch” regime. It can be slightly discombobulating that Hong Kong is a very welcoming jurisdiction for Web3, but also imposes some of the highest standards globally. Be prepared for a significant process and the need to negotiate a lot of the finer detail with the SFC.
The final SFC guidelines are also imminent – watch this space!
If we can help, let us know.
[1] Available here: https://apps.sfc.hk/edistributionWeb/api/consultation/openFile?lang=EN&refNo=23CP1
