Hong Kong Crypto Regulation 2021

Overview of Crypto Regulation in Hong Kong

Hong Kong regulates entities conducting activities in cryptocurrencies where the relevant cryptocurrencies are “securities” or “futures contracts” as defined in Hong Kong’s Securities and Futures Ordinance (SFO). Intermediaries conducting regulated activities in relation to cryptocurrencies that are securities or futures contracts are required to be licensed or registered by Hong Kong’s Securities and Futures Commission (SFC) and must comply with the anti-money laundering (AML) and counter-terrorist financing (CTF) requirements of Hong Kong’s Anti-Money Laundering and Counter-Terrorist Financing Ordinance (the AMLO). However, the vast majority of cryptocurrencies (such as Bitcoin) are not securities. The SFC has however imposed specific regulatory requirements on fund managers and managers of discretionary investment portfolios which invest in cryptocurrencies which are not securities in addition to traditional securities. Similar requirements apply to distributors of cryptofunds even where the funds only invest in cryptocurrencies that are not securities or futures contracts. Operators of exchanges which trade cryptocurrencies are currently only required to be licensed by the SFC where the exchange trades at least one cryptocurrency that is a security. Licensed exchanges are subject to stringent licensing conditions.

Cryptocurrencies are also not regulated by Hong Kong’s other financial regulators. The Hong Kong Monetary Authority (HKMA) has said that it does not regulate cryptocurrencies such as Bitcoin which it regards as a virtual “commodity” and not as legal tender, or a means of payment or money.[1] Hong Kong’s banking laws and regulations therefore do not apply to entities accepting or dealing in cryptocurrencies.

The Money Service Supervision Bureau of the Customs and Excise Department has also said that Bitcoin and other similar virtual commodities are not money for the purposes of the AMLO, and are thus outside the scope of its regulatory regime for money service operators.[2]

However, on 3 November 2020, Hong Kong’s Financial Services and Treasury Bureau (the FSTB) published a consultation on proposals to introduce a new licensing regime under the AMLO for virtual asset exchanges that are not required to be licensed under the SFO because they only trade cryptocurrencies that are not securities or futures contracts. The proposals will require virtual asset exchanges to be licensed by the SFC and comply with the AML and CTF obligations set out in Schedule 2 to the AMLO and the SFC will monitor and enforce compliance with these obligations. Exchanges will also be subject to stringent licensing conditions which will be broadly the same as those imposed on exchanges licensed under the SFO in order to create a level playing field. If implemented, the new regime will fulfil FATF’s requirements for virtual asset exchanges. Hong Kong is not however considering regulating other entities within the FATF’s definition of virtual asset service providers or VASPs at this stage, such as certain types of wallet providers.

For the purposes of this note, the terms “cryptocurrency” and “virtual asset’ are used interchangeably.

However, on 21 May 2021, the Hong Kong’s Financial Services and Treasury Bureau (the FSTB) issued the Consultation Conclusions on Legislative Proposals to Enhance Anti-Money Laundering and Counter-Terrorist Financing Regulations in Hong Kong following a three-month public consultation which commenced on 3 November 2020. In response to the requirement of the Financial Action Task Force (“FATF”) for jurisdictions to regulate virtual asset service providers (VASPs) for AML/CFT purposes and to supervise their compliance, the FSTB proposes to introduce a new licensing regime in Hong Kong for VASPs, Under this licensing regime, any operator of a virtual asset exchange in Hong Kong would be required to apply for a licence from the SFC and be subject to AML/CFT requirements (including customer due diligence and record-keeping requirements) set out under Schedule 2 to the AMLO as well as other regulatory requirements (the monitoring and compliance of which would be enforced by the SFC who are expressly empowered to do so). Such licensing regime would mean that any trading platform which facilities the offer, sale or purchase of any virtual assets in exchange for money or other virtual assets would be required to comply with various licensing requirements (including the appointment of responsible officers and satisfaction of fit and proper test) which are broadly the same as those imposed on exchanges licensed under the SFO. The regulation of other entities within the FATF’s definition of VASPs (such as certain types of wallet providers) are however not intended to be regulated at this stage.

The Government wishes to put forward the AMLO amendment bill before the legislature in the 2021-22 legislative session. For a detailed discussion of the Consultation Conclusions, please see our newsletter FSTB Concludes Consultation on Licensing Regime for Hong Kong Virtual Asset Exchanges.

• HKMA. Press release “The HKMA reminds the public to be aware of the risks associated with Bitcoin”. 11 February 2015.
• Money Service Supervision Bureau. Customs and Excise Department. “Statement in relation to “Bitcoin and Money Service Operator Licence”. August 2014.