Public Consultation on Regulatory Regime for Crypto Trading Platforms and Precious Metals Dealing to enhance Anti-Money Laundering and Counter- Terrorist Financing Measures in Hong Kong
The Financial Services and the Treasury Bureau (“FSTB”) of Hong Kong has on 3 November 2020 announced the start of a public consultation exercise to gauge public views on the introduction of licensing regime for virtual asset service providers and a two-tier registration regime for dealers in precious metals and stones (“DPMS”) to enhance anti-money laundering and counter-terrorist financing (“AML/CTF”) regulation in Hong Kong. Miscellaneous technical amendments under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (“AMLO”) are also addressed. The legislative proposal is intended to bring Hong Kong’s regulatory regime up to par with the latest requirements of the Financial Action Task Force (FATF), of which Hong Kong has been a member since 1991.
The consultation will last for three months, until 31 January 2021. Details of the public consultation can be found here:
Introduction of a licensing regime for Virtual Asset Service Providers (“VASP”)
The proposal calls for the introduction of a licensing regime, whereby any person seeking to conduct the regulated business of virtual asset trading platforms in Hong Kong will be required to apply for a licence from the Securities and Futures Commission (“SFC”) subject to satisfaction of a fit-and-proper test. If such regime is implemented, all VASPs will be subject to AML/CTF requirements under the AMLO and relevant regulatory requirements for investor protection purposes.
In recent years, Hong Kong has recorded great trading volume of cryptocurrencies and virtual assets, which have now caught the eye of the regulatory bodies. Under current law, virtual assets are not regarded as legal tender and not generally accepted as a means of payment in Hong Kong. In view of the increase of virtual asset trading activities, the SFC has in 2019 put in place a regulatory regime that sets out regulatory standards comparable to those applicable to licensed securities brokers and automated trading venues. However, the regime is an opt-in regime and voluntary in nature. It also only applies to those VASPs which allow the trading of virtual assets with securities feature. VASPs solely trading non-securities virtual assets are not covered under the current regime. This new proposed amendment addresses the need for investor protection, so that related trading activities may be less susceptible to fraud, security breach and market manipulation.
Two-tier registration regime for Dealers in precious metals and stones
Under the proposed amendments, any person seeking to conduct the regulated business of dealing in precious metals, stones, products, or precious-asset-based instruments in Hong Kong will be required to register with the Commissioner for Customs and Excise. Those who seek to engage in cash transactions at or above HK$120,000 during the course of business will be subject to the AML/CFT requirements under the AMLO, in addition to satisfying the fit-and-proper test for registration under the dedicated category.
Despite being a less common type of transaction, the DPMS sector plays a significant role in Hong Kong’s import and export trade. As of 2019, Hong Kong exported HK$204 billion worth of gold and $20 billion worth of silver, platinum and other metals of the platinum group. With the high volume of trade activity in Hong Kong, the importance of regulating DPMs cannot be understated. The proposed two-tier registration aims to fill the gap of the AML/CFT regime to regulate the DPMS sector.
Technical amendments to the AMLO
Technical amendments under the AMLO is also proposed to be addressed in the amendments, which would include:
- Amendments to the definition of “politically exposed person” and empowering regulatory authorities to make guidelines allowing the exemption of enhanced customer due diligence requirements in respect of former politically exposed persons on a risk-sensitive basis;
- Aligning the definition of “beneficial owner” in relation to trust under the AMLO with that of “controlling person” under the Inland Revenue Ordinance (Cap. 112);
- Increasing deterrence against unlicensed money service operations by strengthening the level of criminal sanction; and
- Consolidating the different provisions under relevant laws enabling regulatory authorities to exchange supervisory information for AML/CTF purposes into a unified provision under the AMLO.