Hong Kong to Bar Retail Investors from Crypto Trading

Hong Kong’s FSTB has issued consultation conclusions on the new licensing regime for VASPs and a new registration regime for precious metals dealers.

Hong Kong’s FSTB (Financial Services and the Treasury Bureau) has published consultation conclusions setting out the new AML/CTF requirements that will be introduced for the VASP (virtual asset services provider) and DPMS (dealers in precious metals and stones) sectors.

In November 2020, the FSTB issued a consultation on legislative proposals to introduce a new licensing regime for VASPs, as well as a two-tier registration regime for the DPMS sector, among other amendments. The consultation received 79 submissions, 47 of which were focused solely on the VASP regime.

The FSTB says a majority of the respondents indicated agreement with the overall direction and principles of the proposals, expressing a need to regulate the VASP and DPMS sectors as required by the FATF (Financial Action Task Force).

The conclusions paper highlighted Hong Kong’s favourable mutual evaluation from the FATF, adding that “there is no room for complacency” if the city is to continue to maintain its competitiveness as an international financial centre.

VASP sector

As proposed in the consultation, the FSTB will adopt a proposal to require any person seeking to conduct the “regulated VA activity” of operating a virtual asset exchange in Hong Kong to obtain a VASP licence from the SFC (Securities and Futures Commission), subject to passing a fit and proper test.

Licensed VA exchanges will be subject to the AML/CTF requirements stipulated under the AMLO, as well as other regulatory requirements designed to ensure the protection of market integrity and investor interests.

Under the new regime, those found to be operating unlicensed VA businesses can face up to HKD 5 million in fine and seven years’ imprisonment.

Those found to be providing false statements in licence applications, not compliant with AML/CTF requirements, or committing fraudulent or reckless misrepresentation to induce investors to buy or sell a VA will face a fine of HKD 1 million and two years’ imprisonment.

The FSTB has decided to allow non-locally incorporated companies to participate obtain a VA exchange licence in Hong Kong, provided they are also registered as companies in Hong Kong.

The SFC will prepare and publish for consultation detailed regulatory requirements before commencement of the new licensing regime, to ensure the industry has sufficient guidance on regulatory expectations.

Retail investors

The paper says 40 percent of respondents expressed a view that retail investors should be allowed to trade in virtual assets, not just professional investors as proposed in the consultation.

The FSTB said it was concerned about the risk implications and “highly speculative nature” of virtual assets, and that confining trading to professional investors only is “necessary to ensure a proper degree of protection for the investing public”.

In February, the industry body GDF (Global Digital Finance) warned that the move could prompt retail investors to move to unlicensed and peer-to-peer platforms and thus be exposed to much greater risks.

Nevertheless, the FSTB will adopt the proposal to restrict VA trading to professional investors “at least for the initial stage of the licensing regime.”

Under the SFO, to be classified as a professional investor, an individual must have a portfolio worth over HKD 8 million. (HKD 40 million in total assets for companies)

DPMS sector

The two-tiered registration system for the DPMS sector will be introduced, subjecting all cash transactions worth HKD 120,000 and above to the same AML/CTF obligations now applicable to other DNFBPs (designated non-financial businesses and professions).

Category A registration is required for DPMS who will not engage in any cash transactions at or above this threshold, while Category B registration is for those that will exceed the threshold. A register of DPMS will be maintained and available to the public.

A HKD 100,000 fine and six months imprisonment can be imposed for carrying the wrong registration (or no registration) for the relevant MPMS activities. A HKD 500,000 maximum penalty may be imposed for breaches of AML/CTF requirements.

Financial institutions engaged in DPMS trade that are already regulated under the AMLO for AML/CTF purposes will be exempt from the registration requirement.

Other amendments

The definition of PEP (politically exposed person) will be amended, and regulatory authorities will be empowered to make guidelines to allow the exemption of enhanced CDD requirements in respect of former PEPs on a risk-sensitive basis.

The definition of ‘beneficial owner’ will be better aligned in relation to a trust under the AMLO with that of ‘controlling person’ under the Inland Revenue Ordinance, i.e. where a trust is concerned, ‘beneficial owner’ it includes trustees, beneficiaries and classes of beneficiaries

Digital identification systems can be engaged to facilitate CDD in situations where a customer is not physically present, to provide more flexibility to financial institutions and DNFBPs in their adoption of fintech.

Fines for conducting unlicensed money service operation will be raised to HKD 1,000,000 and two years’ imprisonment (from HKD 100,000 and six months imprisonment currently)

Implementation

The FSTB said it will proceed to prepare the AMLO amendment bill based on the consultation conclusions, with a view to introducing the amendment bill into LegCo in the 2021-22 legislative session.

The 180-day transitional period proposed in the consultation will be adopted.

Article credit: https://www.regulationasia.com/hong-kong-to-bar-retail-investors-from-crypto-trading/