1. A recent arbitration case in Hong Kong is worth paying attention to. A woman had several virtual currencies stored on a virtual asset trading platform in Hong Kong. After a period of time, the platform froze her account on the grounds that her property was suspected of being involved in money laundering, and even after the woman provided an explanation to the platform, the account was still not unfrozen. The woman has now initiated an arbitration in Hong Kong.
2. In the context of the new anti-money laundering regulations just introduced in Hong Kong, there are no effective case precedents or interpretations as to what circumstances in virtual asset trading or transfers will justify the platform’s “suspicion” as “reasonable,” the reasonableness of the platform’s measures, or the legal remedies available to customers in such circumstances. Therefore, it seems more effective to resolve the issue through arbitration rather than through legal proceedings.
On May 23 of this year, the Hong Kong Securities and Futures Commission (HKSFC) issued a summary of the “Proposed Regulatory Requirements for Virtual Asset Trading Platform Operators Licensed by or Registered with the Securities and Futures Commission” and its accompanying “Guidelines for Virtual Asset Trading Platform Operators” and “Guidelines for Combating Money Laundering and Terrorist Financing,” which came into effect on June 1.
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The HKSFC is mainly responsible for issuing licenses to compliant platforms to operate virtual asset transactions and approving the inclusion of certain virtual assets in retail trading, indicating that the HKSFC is primarily responsible for supervising the platform and its affiliated companies, rather than specific operational practices. Among other things, the HKSFC requires platforms to assess customer risk tolerance through “know your customer” (KYC) evaluations and establish further protection for investors (especially retail investors), such as insurance and compensation mechanisms. It is therefore apparent that after completing compliance and obtaining a license, the platform is granted significant authority by the HKSFC to handle transactions with customers.
Additionally, the Guidelines for Combating Money Laundering highlight the risks of illegal elements using the anonymity and transaction speed of virtual assets to launder black money, as well as the regulatory standards and standards for combating money laundering/terrorist financing and the factors to be taken into account in conducting risk-based risk assessments, customer due diligence, and continuous monitoring specifically for virtual assets, as well as the regulations on virtual asset transfers and third-party deposits and payments made in virtual asset form (the Sa Sisters team has compiled a list of compliance points for anti-money laundering, which fully summarizes the compliance points of Hong Kong’s new anti-money laundering regulations). Among other things, platforms are required to take reasonable measures based on the risk sensitivity of money laundering/terrorist financing, including implementing transfer principles to collect relevant information, and monitoring in real time or after the fact to identify transfers lacking information and suspend them.
From the above basic information, it can be seen that the Hong Kong Special Administrative Region aims to create a virtual platform trading market that is regulated by the HKSFC and autonomous. Although the HKSFC has imposed various literal protections for investors, doubts about the platform’s authority to dispose of customer property have not been dispelled. The Sa team has specifically summarized a general case for analysis under Hong Kong law, which is presented to readers.
A certain woman has a certain amount of virtual currency stored on a virtual asset trading platform in Hong Kong. After a period of time, the platform froze her account on the grounds that her property was suspected of money laundering, and still refused to unfreeze it even when the woman explained it to the platform.
Known: The platform implements corresponding contract terms in accordance with Hong Kong law.
II. Case analysis
Under the new system, central virtual asset trading platforms (VATPs) that intend to operate in Hong Kong after June 1, 2023, whether or not they have previously operated virtual asset trading in Hong Kong, need to apply for a license from the HKSFC in accordance with the “Securities and Futures Ordinance” (Chapter 571) and/or the “Anti-Money Laundering Ordinance” (Dual license system), otherwise it will constitute a criminal offense.
A VATP that provides virtual asset trading services in Hong Kong before June 1, 2023, and substantially exists (that is, carries out real business and actually exists) can continue to provide the service in Hong Kong from June 1, 2023 to May 31, 2024 (that is, in the first 12 months from June 1, 2023), and rely on ‘non-violating arrangements’ will not violate the relevant provisions of the new anti-money laundering law.
In short, if a customer conducts transactions or transfers on an unlicensed virtual asset trading platform, and the platform has not previously operated in Hong Kong / has previously operated in Hong Kong but the transition period has expired, the platform will be classified as an ‘unregulated’ platform, and the customer needs to bear the risks and legal responsibilities of trading on the unregulated platform.
Effectiveness of terms
Generally, the platform will publish the service terms (Terms of Service) on its webpage or application, and consider that the customer agrees that the term is binding on it by default by the customer checking ‘Agree to the above terms’ or browsing and accessing it, thus forming a contract term that both parties agree and accept.
These terms often contain a large number of clauses that allow the platform to mitigate risk, waive liability and compensation, and impose additional requirements on customers. For example, some platforms grant themselves the power to freeze customer funds and suspend/terminate customer accounts through such service terms. However, customers who engage in virtual currency trading are not legally recognized as ‘consumers’, which means that the principle of reasonableness for testing the validity of unequal bargaining clauses does not apply to the contract. At the same time, whether the contract terms are made in good faith is also a difficult factual issue in law. Starting from the ambiguity of the terms, it is difficult to refute the platform’s legitimacy of not disclosing limitations on functions, unclear unblocking conditions, unclear duration and termination methods, and unclear fund flow after freezing, etc. However, it is also difficult to be regarded as an invalid clause in common law due to the principle of reasonableness.
In addition to confirming facts and collecting evidence to resolve legal issues related to contract terms, if customers seek court rulings, they will suffer interest losses due to frozen funds during the period, as well as bear the huge risks of funds becoming unrecoverable because of the volatile liquidity of the virtual currency market and the platform.
The Obligations and Responsibilities of the Platform
In the guideline for combating money laundering, HK SFC authorizes platforms to conduct due diligence and continuous monitoring of customers, and adopt reasonable measures on the risk sensitivity of unhosted wallets for money laundering/terrorist financing. However, the platform’s adoption of measures based on ‘reasonable suspicion’ cannot be an excuse for justifying arbitrary disposal of customer property.
In the guideline, HK SFC points out that suspicion is more subjective. For financial institutions (applicable to VATP here), if a customer’s transaction or series of transactions is inconsistent with the platform’s knowledge of the customer, or is unusual (such as having no clear economic or legal purpose), the platform should take appropriate measures to further verify the transactions and identify whether there are any suspicious circumstances. For those who are aware of or suspect, they do not need to know the nature of the relevant criminal activities involving money laundering, or whether the funds are proceeds of crime.
Where a customer transaction has any of the following characteristics, VATP should take appropriate steps (such as checking the background and purpose of the transaction, making appropriate inquiries of the customer, or obtaining additional customer due diligence information) to identify whether there are any grounds for suspicion:
(a) not consistent with the financial institution’s knowledge of the customer, the customer’s business, risk profile, or source of funds;
(b) the financial institution identifies (i) transactions that are complex, unusually large, or patterns of transactions that are unusual; and (ii) transactions that have no apparent economic or legal purpose.
The guideline provides that where a financial institution fails to obtain a credible and reliable explanation about a transaction or activity, there may be grounds for suspicion. If anything suspicious is found during the process of transaction monitoring, the suspicious transaction report should be submitted to the Joint Financial Intelligence Unit.
If a financial institution makes inquiries into and obtains what it considers to be a credible and reliable explanation for an activity or transaction, there may be no grounds for suspicion and no further action may be taken. Even if no suspicious circumstances are found, the financial institution should consider updating the customer’s risk profile based on relevant information obtained.
It can be seen that HKSFC is trying to define the scope of reasonable suspicion to prevent platforms from abusing their power to capture users’ personal information and freeze customer funds.
After the platform takes action, is it possible to return to the original account?
For example, in the case of processing incoming virtual asset transfers that lack the required information, VATP only returns virtual assets in appropriate circumstances and when there is no suspicion of money laundering/terrorist financing activities, and after considering the due diligence of the counterparty to the virtual asset transfer and screening the virtual asset transaction and related wallet addresses. In addition, the virtual assets should be returned to the remitter’s account, not the remitter’s account.
The weakness of Hong Kong’s current law is that there are no effective case precedents to explain what circumstances will make the ‘suspicion’ of the platform ‘reasonable’ in virtual asset transactions or transfers, the reasonableness of platform measures, and the legal remedies available to customers in this situation, especially given the newly enacted anti-money laundering regulations.