Since the end of 2022, Hong Kong has announced its embrace of virtual assets and the establishment of the World Virtual Asset Center. It has made a series of arrangements in terms of legal regulations to extract the essence and put virtual assets in the “cage” of financial supervision, maximizing the risk control of virtual assets and providing protection for financial consumers as much as possible. Considering that the pricing mechanism of most virtual assets highly relies on market sentiment, issuance, circulation, and other links with opaque information, Hong Kong has decided to incorporate virtual assets into the existing “licensing” financial regulatory system.
In order to achieve the above goals, the Hong Kong Legislative Council completed the latest revision of the “2022 Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance” (hereinafter referred to as the “Anti-Money Laundering Ordinance”) on December 7, 2022. It has tailored a licensing system for Virtual Asset Service Providers (VASPs) operating in Hong Kong, which will be officially implemented from June 1, 2023. Subsequently, the Securities and Futures Commission of Hong Kong has repeatedly emphasized in legal regulations, normative documents, and guidance documents such as the “VASP Consultation Summary” and the “Guidelines for Virtual Asset Trading Platform Operators”: “Engaging in unlicensed activities in Hong Kong is a criminal offense”.
Today, the Sa Jie team will discuss the possible legal risks arising from a series of improper business practices recently carried out by some virtual asset practitioners in Hong Kong.
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01 Current Introduction to the VASP Licensing System in Hong Kong
As mentioned earlier, VASP businesses operating under regulation in Hong Kong must hold the corresponding licenses. Currently, Hong Kong regulatory authorities provide two sets of VASP licenses for virtual asset practitioners to choose from.
The first type is the “VASP” license. According to Article 53ZRD of the Anti-Money Laundering Ordinance, anyone who operates a business providing virtual asset services or holds oneself out as operating such a business must apply for a license from the Securities and Futures Commission. According to Article 53ZRB of the Anti-Money Laundering Ordinance, anyone who actively promotes any services they provide to the public, and if such services would constitute virtual asset services if provided in Hong Kong, will be regarded as providing virtual asset services.
The second type is the traditional “financial regulatory” license (Type 1 and Type 7 licenses). Some virtual asset practitioners believe that after the Anti-Money Laundering Ordinance takes effect on June 1, 2023, the previous measure of the Securities and Futures Commission of Hong Kong bringing virtual asset trading platforms under the regulation of traditional 12 types of financial licenses will no longer apply to VASP businesses. However, this perception is incorrect. The Securities and Futures Commission of Hong Kong has already clarified in subsequent explanatory documents: “Virtual asset trading platforms intending to provide services for security-type tokens must hold licenses for regulated activities under the Securities and Futures Ordinance, Type 1 and Type 7.” For example, if you want to operate a simple virtual currency trading platform in Hong Kong without any additional financial operations, you only need to apply for the “VASP” license to operate in compliance. However, if you want to “empower” this trading platform by treating virtual currency (or other virtual assets) as a financial product similar to securities, you must apply for both the “VASP” license and Type 1 and Type 7 licenses.
02 Non-licensed institutions falsely claim to be licensed and engage in VASP business
Recently, the Securities and Futures Commission of Hong Kong (SFC) has noticed cases of illegal operations by some virtual asset service providers (VASPs) and has issued a warning article titled “Warning: Improper Operating Practices of Virtual Asset Trading Platforms.” The article points out that some unlicensed VASPs falsely claim to be licensed and engage in VASP business and the sale of virtual assets to the Hong Kong public.
This behavior is extremely dangerous and may constitute a criminal offense. According to Section 53ZRG of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance: Any person who makes fraudulent or false statements, regardless of whether by misrepresentation or by omission, in order to induce another person to enter into an agreement to acquire, dispose of, subscribe for, or underwrite any virtual asset, commits a criminal offense. A person who commits such offense is liable to a fine of HKD 1,000,000 and imprisonment for 7 years upon conviction after a trial; or if convicted summarily, to a fine at level 6 and imprisonment for 6 months.
Referring to the case of Mr. Wei and Mr. Zhang, who engaged in unlicensed activities, as announced by the SFC in 2023, the two individuals falsely claimed to be agents of two US financial companies and induced three retail investors to invest in so-called “US-listed” company shares. The stock subsequently experienced a significant decline. The Eastern Magistrates’ Courts convicted the two individuals of the offenses on July 5th and July 27th, respectively, and imposed penalties.
03 Operating VASP business without a license but having applied for one
In addition to the improper operation of VASP businesses by those who have not applied for relevant licenses but falsely claim to be licensed, there is another group of practitioners who have indeed applied for licenses and have been operating VASP businesses through legal entities before the amendment to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, but have not yet been licensed. Such entities have also been found to have exaggerated facts and engaged in non-compliant operations.
According to a circular published by the SFC at the end of May, titled “Transition Arrangements for the New Licensing Regime for Virtual Asset Trading Platforms,” Hong Kong’s existing virtual asset trading platforms can be regarded as VASPs (provisionally licensed VASPs) engaged in providing virtual asset services, starting from June 1, 2024, if they meet the following conditions:
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Content |
Legal Basis |
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Condition 1 |
The virtual asset trading platform, between June 1, 2023, and February 29, 2024 (i.e., within the first nine months starting from June 1, 2023), has submitted a fully completed license application to the SFC via WINGS. |
Section 53ZRK of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance |
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Condition 2 |
The virtual asset trading platform confirms in its license application: (1) It has been providing virtual asset services in Hong Kong immediately prior to June 1, 2023; (2) It will comply with the regulatory requirements applicable to licensed virtual asset trading platforms when being regarded as having been licensed on June 1, 2024; (3) It has made arrangements to ensure compliance with the regulatory requirements applicable to licensed virtual asset trading platforms when being regarded as having been licensed on June 1, 2024. |
Section 53ZTO(1) of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance; Schedule 3G, Section 3(1)(b)(ii), Section 1, and Section 3(1)(b)(iii)(A) of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance |
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Condition 3 |
The virtual asset trading platform can prove in its license application and satisfy the SFC. |
Section 3(2) of Schedule 3G of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance |
However, the Sa Jie team reminds that quasi-licensed VASPs are not the same as licensed VASPs and should not directly claim to be licensed institutions in their external publicity. In addition, quasi-licensed VASPs are entities that are striving to obtain licenses and establish compliance. Each license is hard-won. The China Securities Regulatory Commission (CSRC) has made it clear that if a quasi-licensed VASP that is currently applying for a license has engaged in some non-compliant activities in the past, the CSRC will consider whether these activities could have been reasonably avoided. VASPs should not be too aggressive before they succeed, so as not to be deemed “inappropriate applicants” by the CSRC and have their applications rejected at a great cost.
So, what should quasi-licensed VASPs do if they have engaged in improper operations and exaggerated publicity? The Sa Jie team believes that if a quasi-licensed VASP has conducted improper business activities “inadvertently” due to unfamiliarity with legal norms, there is no need to panic. As long as they rectify their business operations in compliance, it will not have a significant impact on obtaining a license in the future. As the saying goes, it is never too late to mend. When evaluating the license applications of virtual asset trading platforms, the CSRC will also consider whether they can prove their sincere intention to rectify non-compliant activities, including gradually phasing out unauthorized transactions and stopping exaggerated publicity in an orderly manner.
04 Final Thoughts
For financial consumers, the series of regulatory measures by the Hong Kong Securities and Futures Commission (SFC) is very helpful in protecting their investment interests. Licensed VASPs, compared to unregulated VASPs, may have more restrictions in terms of trading, but these restrictions also significantly reduce the risks for investors. The Sa Jie team recommends that investors, especially non-professional investors, choose licensed VASPs for trading as much as possible. Currently, in Hong Kong, licensed platforms that can conduct securities-type virtual asset trading can be found on the “List of Virtual Asset Trading Platforms” on the SFC’s official website. Non-professional investors must do their homework before making investments.
Above is today’s sharing. Thank you, readers!
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