Please note that we provide links to external sites which were correct at the time of publication, but they may be updated. Cognitive GRC provides advisory services to regulated firms in Hong Kong on international requirements and works with various service partners to deliver these services. Firms should obtain specific advice relating to matters that we highlight here. The following is neither legal, accounting or investment advice.
A Guide to Hong Kong’s Digital Asset Developments for firms contemplating licensing.
This page aims to provide an overview of the regulatory developments in Hong Kong’s digital asset space and highlight key changes that may influence a firm’s decision regarding licensing. It is not intended as investment advice. We have closely monitored technical developments and engaged in industry discussions to maintain a comprehensive understanding of relevant changes. Although few firms have ventured into this space, we believe it is crucial for all firms to stay informed about this dynamic regulatory and commercial environment. This guide is intended for industry participants and practitioners, not individual investors, who should seek advice from duly licensed and experienced firms who can provided advice on investments. We can assist with licensing and ongoing compliance for firms that are regulated.
Hong Kong's updated Anti-Money Laundering Ordinance ("AMLO") heralded the introduction of the Virtual Asset Service Provider ("VASP") regime commencing from 1st of April 2023 and ushered in a period of accelerated progress towards a balanced regulatory environment that feels like it was finally moving at pace that offered hope to participants that Hong Kong has now found its goldilocks speed.
The timing of market events in 2022 (e.g. FTX), almost blessed the Hong Kong regulator's cautious approach. It supports a need for a controlled lift off, over an overly exuberant evangelistic emergence of new market opportunities. When it comes to developing any such market, ensuring healthy scepticism without frustrating innovation is key. While many jurisdictions are seeking the lead, perhaps like the hare and tortoise race, Hong Kong's cautious but steady approach has managed to take a lead, although for market participants, it may feel like it is moving at glacial pace.
A key contributing innovation was the way the SFC neatly side stepped the thorny and litigious issue that has dogged other markets, in particular the US, regarding whether a coin should be regulated as a security or not by simply expecting all participants interested in offering access to digital asset exchange to hold or apply for licenses to cover both Securities and Futures Ordinance (SFO) activities under the existing securities regime, while also applying for licenses to cover the same activity for non-securities services activities under the Anti-Money Laundering Ordinance. {Not all firms in the market will need to facilitate the exchange of assets in the way a Virtual Asset Trading Platform (VATP) does and therefore some will only be required to uplift their current SFO licences in order to introduce clients to VASPs.}
The SFC register was updated in 2023 to reflect the new concepts and now recognises that firms need different types of licence if they are involved in exchanging virtual assets on behalf of clients.
The SFC provides a way to see who is doing what: and importantly under what conditions:
Operating a virtual asset trading platform
Managing portfolios that invest more than 10% in virtual assets
Providing virtual asset dealing services under an omnibus account arrangement
Providing virtual asset advisory services
Acting as an introducing agent for a virtual asset trading platform
The licencing conditions are important as the SFC has issued and updated the terms under which these firms will be granted licenses. While standard conditions have typically ranged from one line to seven, the new conditions that are being applied to firms seeking to provide services around virtual assets are more extensive and detailed.
Following market events in 2023, including some firms incorrectly asserting that they were registered to take advantage of the transitional period, the regulator published a list of applicants so that the public could see which firms had applied, which had been accepted as passing the initial external review of appropriateness, which firms had been asked to withdraw, and which firms had been asked to stop operating. (SFC VATP Applicants: Source SFC).
Reports of hundreds of applications had been overblown and while many firms contemplated a home in Hong Kong at the time, these numbers have dropped significantly as time has gone by.
The technical determination of which ordinance applies [i.e. SFO or AMLO] will remain something that labours us technical experts when writing out policy and procedures. It eliminates a mass of potential issues for the market by helping to manage the risk of having to deal with developing interpretations of whether an instrument is a security or not, as it prevents the transaction being found to be illegal due to its source of regulation due to difference of interpretation. [Clearly being seen in the US where commissioners still differ on many aspects of interpretation. See Statement on the matter of FlyFish Club, LLC. (Source SEC, Credit to Future of Money with Henri Arslanian for highlighting it)
As parties involved in trade settlement will need to be licensed under both the SFO and AMLO, the impact of a change of interpretation or status of a coin, will be less of an issue for service providers, and their counterparties, as the validity of the transaction, or the status of the agent/introducer will not be impacted by such technicalities at least, for now, in Hong Kong.
Click the following chevrons for more detail on areas of interest. Some are high level background, whereas some of the sections would be more for technical practitioners of compliance science. We also provide an overview of the developments over the last couple of years and cover the latest updates for Hong Kong.
Same Business, Same Risks, Same Rules - Where did that come from, rabbit hole? (Click on arrow to expand)
Where/when did this principle emerge, we took a look as it feels like it has creeped into the dialogue in senior regulatory discussions: Some potential (external) sources here: Monitoring, regulation and self-regulation in the European banking sector (europa.eu) 2015, Regulation, supervision and market discipline – striking a balance (europa.eu) 2017, PWG-Stablecoin-Statement-12-23-2020-CLEAN.pdf (treasury.gov) 2020, FSB issues statement on the international regulation and supervision of crypto-asset activities - Financial Stability Board 2022, AIMA-APAC-Annual-Forum-2022---Eng_20220906.pdf (sfc.hk), 2022.
We are drawn to the emergence of this principle because it is a neat way to address many a failing of previous regulatory engineering. The phrase has been given a thorough airing in justification for applying traditional regulation to new product types. If only this concept had emerged prior to the global financial crisis, perhaps the resulting pain could have been avoided. It is more likely that the concept arose because of that shared experience. You will find further meaning in the provided resources to give you a better grounding in the concept being discussed.
Briefing on AMLO changes relating to Virtual Assets (Video Update) (Click on arrow to expand)
Developing Ecosystem - Expand for Visualisation of developing market architecture (Click on arrow to expand)
Capital Requirements per type of licence (Click on arrow to expand)
Retail Aspects introduced in 2024 (Click on arrow to expand)
Timing and development of the digital asset market ecosystem and licencing (Click on arrow to expand)
VA ETFs bringing with them Custody and Suitability implications (Click on arrow to expand)
Latest Updates on Digital Assets in Hong Kong (Click on arrow to expand)
Our journey within the industry since introduction of new AML requirements (Click on arrow to expand)
Our digital assets team have experience working for licensed providers and assisting firms assess their compliance requirements.
While there are still many issues to address, we recognise that the challenges in the digital asset markets, are not particularly new, and experts from traditional finance markets are well equipped to curate the new innovations in decentralised finance technologies in a way that avoids the potential pitfalls when the uninitiated are allowed to grow businesses without considerations of the potential risks that are generated due to the interconnectivity of our global market dependency.
This new regulatory architecture facilitates an efficient achievement of stakeholders' goals and paves the way to provide cautious improvement to the broader market ecosystem by balancing the innovation of new technologies with the experience of the old.