Introduction
On 7 December 2022, the Legislative Council handed the Anti-Cash Laundering and Counter-Terrorist Financing (Modification) Invoice 2022 (the “Modification Invoice”). Gazetted on 16 December 2022, the Anti-Cash Laundering and Counter-Terrorist Financing (Modification) Ordinance, (the “Amended Ordinance”) establishes, amongst different issues:
(1) a licensing regime for digital asset service suppliers (“VASPs”); and (2) a registration regime for sellers in treasured metals and stones (“DPMSs”).
Whereas we beforehand coated the Monetary Providers and Treasury Bureau’s session conclusions and the developments main as much as the Modification Invoice in relation to the 2 regimes (see right here and right here to be taught extra), the Amended Ordinance has adopted some additional amendments to the 2 regimes that weren’t beforehand contemplated. A Report of the Payments Committee on the Invoice (the “Report”) was additionally revealed on the day the Modification Invoice was handed, shedding mild on the legislative intent behind sure provisions of the Amended Ordinance.
Shortly thereafter, the Securities and Futures Fee (the “SFC”) issued a Assertion on digital asset preparations claiming to supply returns to traders (the “Assertion”), which lends itself to this consumer alert’s discussions on the VASP licensing regime.
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2022 END-OF-YEAR UPDATE ON THE UPCOMING REGULATORY REGIMES FOR VIRTUAL ASSET SERVICE PROVIDERS AND DEALERS IN PRECIOUS METALS AND STONES
This consumer alert goals to offer the reader additional insights into the 2 regimes, in addition to an summary of the SFC’s newest reminder of the dangers related to digital property (“VAs”).
VASP licensing regime
Are NFTs a “VA” (digital asset) for the aim of the Amended Ordinance?
It relies upon.
Whether or not non-fungible tokens (“NFTs”) would represent a “VA” would largely rely upon the character and capabilities of the NFT in query. As an example, an NFT that incorporates fungible parts or permits holders to vote on its association could also be thought to be a “VA”.
However even the place a selected NFT constitutes a “VA”, a VASP license would solely be required if an individual’s exercise in relation to that NFT constitutes a “VA Service” (as outlined in Schedule 3B to the Amended Ordinance). At this time limit, the one “VA Service” is working a VA alternate. Accordingly, individuals shopping for and promoting NFTs with out working an alternate will unlikely be required a VASP license.
The SFC will take into account issuing steering relating to the regulatory therapy for particular tokens the place it considers it essential to take action after reviewing each the Amended Ordinance and the Securities and Futures Ordinance (“SFO”).
Will the definition of “VA Providers” cowl different types of VA actions?
As talked about above, the VASP licensing regime solely at present regulates the carrying on of a enterprise of working a VA alternate.
Nonetheless, when essential, the Secretary for Monetary Providers and the Treasury might train its legislative energy to broaden the scope of “VA Service” by amending Schedule 3B to the Amended Ordinance to incorporate different types of VA actions (e.g. over-the-counter VA buying and selling) sooner or later.
Will (and if that’s the case, how will) abroad operators of VA exchanges be regulated?
The Amended Ordinance incorporates varied provisions prohibiting the supply of VA companies in Hong Kong (together with the lively advertising and marketing of VA companies by abroad VA exchanges to the Hong Kong public) with out a legitimate VASP licence.
There are comparable provisions within the SFO prohibiting the lively advertising and marketing of securities and futures-related actions to the Hong Kong public with out the right SFO licences. The idea of “lively advertising and marketing”, as interpreted by the SFC, is nicely understood within the securities and futures context (see this FAQ from the SFC for particulars) – whether or not an individual is “actively advertising and marketing” its companies to the Hong Kong public requires an evaluation of varied elements, together with whether or not the advertising and marketing is performed in a deliberate or concerted or intensive method.
The Authorities expects (as can we) that the idea of “lively advertising and marketing” beneath the VASP licensing regime will probably be interpreted in a fashion just like that beneath the SFO.
What regulatory necessities will licensed VASPs have to abide by?
In our earlier consumer alert, we famous that licensed VASPs will probably be required to abide by strong regulatory necessities which will probably be imposed by the use of licensing circumstances. Particularly, the VASP, and its accountable officers and licensed representatives, will have to be match and correct individuals. The elements that the SFC would take into account in figuring out health and properness are set out intimately in part 53ZRJ of the Amended Ordinance. It’s anticipated that the SFC will present extra color to this by publishing tips sooner or later. Such tips will possible align with the SFC’s Match and Correct Pointers that already apply within the securities and futures context.
Lastly, as will probably be identified to most within the trade by now, licensed VASPs will solely be allowed to supply their companies to “skilled traders”. In line with the SFC’s gradual shift in the direction of a extra liberal and open coverage in
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2022 END-OF-YEAR UPDATE ON THE UPCOMING REGULATORY REGIMES FOR VIRTUAL ASSET SERVICE PROVIDERS AND DEALERS IN PRECIOUS METALS AND STONES
embracing VAs, the SFC has stated that it’s going to take into account permitting retail traders to conduct transactions on licensed VA exchanges sooner or later, supplied that further investor measures are in place.
A reminder of the dangers related to VAs
Regardless of speedy and vital developments with Hong Kong’s VA regulatory framework, the SFC has very visibly and persistently cautioned the general public of the dangers concerned with all VA-related actions and merchandise.
The Assertion, issued on 13 December 2022, reminds the general public of the dangers related to VA platforms providing VA “deposits”, “financial savings”, “earnings” and/or “staking” companies (collectively, “VA Preparations”) in mild of their continued prevalence. As we’re on the subject of the VASP licensing regime, it’s value taking a fast have a look at the Assertion.
The SFC noticed that some VA platforms:
provided excessive “rates of interest” on VA “deposits”, or a every day technology of further VAs at a assured or mounted fee to traders, and that such VAs might then be on-lent by the platform to debtors on different platforms or decentralized lending protocols or utilized in funding or different actions; and/or
provided staking companies to traders the place traders’ VAs could also be delegated to a staking pool to earn staking rewards for traders.
The SFC identified the next key dangers of those VA Preparations:
while some VA Preparations are generally labelled or marketed as “deposits” or “financial savings” merchandise, they’re neither regulated nor the identical as financial institution deposits – consequently, traders will not be afforded with any type of statutory safety;
most VA platforms providing VA Preparations are unregulated, and traders might not be capable to get again their VAs from their accounts and should threat shedding their total funding held on VA platforms;
VAs are uncovered to a plethora of heightened dangers (akin to inadequate liquidity, excessive worth volatility, potential market manipulation and many others.) and should lose all worth; and
some VA Preparations might quantity to unauthorised collective funding schemes beneath the SFO, by advantage of the truth that taking part traders should not have day-to-day management over the administration of their VAs, and the truth that the VAs are pooled and/or managed as a complete by the operator to generate returns for traders; the product is not going to have been vetted by the SFC, nor its provide and advertising and marketing supplies reviewed by the SFC, and consequently, traders could have no safety beneath the SFO.
The SFC ends the Assertion with a brief observe that unlicensed regulated actions might quantity to an offence beneath the SFO. Particularly, it’s an offence beneath the SFO for an individual to:
concern an commercial, invitation or doc which is or incorporates an invite to the Hong Kong public to accumulate an curiosity in or take part in a CIS, until the problem has been authorised by the SFC or an exemption applies (Part 103 of the SFO) – the utmost penalties are a high-quality of $500,000 and three years’ imprisonment plus further penalties within the case of a unbroken offence; or
stick with it a enterprise of promoting or distributing pursuits in a CIS in HK or focusing on HK traders with out an SFC licence until an exemption applies (Part 114 of the SFO) – the utmost penalties are a high-quality of $5,000,000 and 7 years’ imprisonment plus further penalties within the case of a unbroken offence.
DPMS registration regime
Shifting away from the VASP licensing regime, we now contact on developments relating to the DPMS registration regime.
DPMSs finishing up transactions under HK$120,000 will now not have to be registered
The Modification Invoice sought to require each particular person in search of to hold on a enterprise of dealing in treasured metals and stones in Hong Kong to register as both a Class A registrant or Class B registrant.
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2022 END-OF-YEAR UPDATE ON THE UPCOMING REGULATORY REGIMES FOR VIRTUAL ASSET SERVICE PROVIDERS AND DEALERS IN PRECIOUS METALS AND STONES
Nonetheless, to alleviate the burden on small and medium-sized companies, DPMSs finishing up transactions (money or non-cash) under HK$120,000 will now not be required to register as such beneath the Amended Ordinance.
Moreover, a “treasured product”, as outlined in part 53ZTZ of the Amended Ordinance, is now not certified as regards to 50% of its transaction worth being attributable to a treasured metallic and/or treasured stone. References to “attire”, “accent”, “decoration” and “different completed product” (as they appeared within the definition within the Modification Invoice) have additionally been eliminated. The amendments have been made to simplify the evaluation of what constitutes a “treasured product” and because of this, scale back the compliance and regulatory burdens on the trade.
Waiver of charges
In mild of present financial circumstances, the Authorities has proposed waiving registration and associated charges for first registration for DPMSs who’ve been working earlier than graduation of the registration regime and the place the appliance is made inside the 9-month transitional interval, i.e. on or earlier than 31 December 2023.
Delayed implementation
To offer the trade and related regulatory our bodies with extra time to organize for the brand new regimes, the implementation of the Amended Ordinance will probably be postponed. The up to date timeline is about out under:
Authentic Timeline
Implementation of the Amended Ordinance, however (for all sensible intents and functions) excluding the VASP licensing regime
1 January 2023
Graduation of the VASP licensing regime
1 March 2023
Deadline for DPMSs to use for Class A or Class B registration
30 September 2023
Interval throughout which an present VASP will probably be permitted to proceed working with out a VASP licence (part 2 of Half 2 of Schedule 3G to the Amended Ordinance)
Till 29 February 2024
Deadline for an present VASP to file an utility with the SFC in an effort to be deemed licensed till the SFC has decided on its licence utility (part 3 of Half 3 of Schedule 3G to the Amended Ordinance)
On or earlier than 30 November 2023
New Timeline 1 April 2023
1 June 2023 31 December 2023 Till 31 Might 2024
On or earlier than 29 February 2024
How we can assist
Having recognised that VAs are right here to remain, the SFC has, significantly in current months, adopted an more and more liberal and open coverage in embracing the advantages of VAs, while cautiously navigating and managing the dangers concerned. The VASP licensing regime has been within the works for a while, and can, in our view, set up a strong basis to deal with the regulatory limbo of VAs that has existed in years previous, a basis that’s malleable sufficient to cater for speedy modifications on this area and doubtlessly finally lead to giving retail traders entry to the VA market.
Warning, nonetheless, continues to be (and can proceed to be) suggested by the SFC. The Assertion is one more reminder that investor safety and combating unlicensed regulated actions stay prime priorities for the SFC.
Then again, the DPMS registration regime, a results of FATF findings, will undoubtedly enhance the compliance and regulatory burdens of many sellers on this area, significantly SMEs. However, with the prolonged deadlines, and exemption from registration for many who perform transactions under the HK$120,000 threshold, these burdens can hopefully be considerably alleviated. Given the novelty of the regime, we’d encourage
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2022 END-OF-YEAR UPDATE ON THE UPCOMING REGULATORY REGIMES FOR VIRTUAL ASSET SERVICE PROVIDERS AND DEALERS IN PRECIOUS METALS AND STONES
trade members to maintain an eye fixed out for tips and different publications from the Customs & Excise Division (“C&ED”) within the months to come back, in an effort to get a greater understanding of what their expectations and enforcement priorities will probably be.
We advise many consumers within the monetary sector on points relating to VAs, securities, futures, and anti-money laundering. Please get in contact in case you are excited about discussing any of the above.
Associated articles
Set out under for ease of reference is an inventory of our current earlier articles relating to the developments of Hong Kong’s VA and DPMS regimes.
Date 22 December 2022
26 July 2022 17 February 2022 18 June 2021
Title
Hong Kong SFC furthers the greenlight for retail traders to commerce in Digital Asset Futures ETFs
New digital asset service supplier regime to take impact on 1 March 2023
An replace on the digital asset regulatory panorama in Hong Kong
Session conclusions: regulatory regimes for digital asset exchanges and sellers in treasured metals and stones
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2022 END-OF-YEAR UPDATE ON THE UPCOMING REGULATORY REGIMES FOR VIRTUAL ASSET SERVICE PROVIDERS AND DEALERS IN PRECIOUS METALS AND STONES
Contact us
Katherine Liu
Accomplice, Head of finance and monetary companies regulation T: +852 2533 2717 E: [email protected]
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Affiliate T: +852 3166 6933 E: [email protected]
Monica Jia
Trainee solicitor T: +852 2533 2795 E: [email protected]
Karin Asai
Trainee solicitor T: +852 2533 2731 E: [email protected]
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