Hong Kong Sets Deadline for Unlicensed VASPs in Crypto Crackdown

Hong Kong’s regulatory stance on virtual assets (VAs) is entering a new phase, emphasizing a risk-based and prudent approach. Following the “Policy Statement on the Development of Virtual Assets in Hong Kong” in October 2022, the government has actively responded to the evolving VA market. Recent developments include the implementation of a licensing system for Virtual Asset Service Providers (VASPs), ongoing consultations on stablecoin regulation, and a heightened focus on over-the-counter (OTC) trading venues.

The VASP licensing system, initiated on June 1, 2023, has reached a critical juncture. Existing service providers, granted a transitional period, must submit license applications by February 29, 2024. The Securities and Futures Commission (SFC) will assess applicants’ compliance with regulatory requirements and their substantial operations in Hong Kong. Those failing to meet criteria may receive a “No-deeming notice,” requiring them to cease operations by May 31, 2024, or within three months of notice issuance.

Hong Kong’s regulatory approach centers on the principle of “same activity, same risk, same regulation,” intending to address investor protection and money laundering and terrorist financing (ML/TF) risks associated with VA activities. Two licensed VA trading platforms currently offer Bitcoin (BTC) and Ethereum (ETH) trading services to retail investors, subject to rigorous SFC regulation.

Christopher Hui, Secretary for Financial Services and the Treasury, emphasizes the need for transparency and a robust regulatory environment to encourage financial innovation. He cautions investors about the inherent volatility of VAs, stressing the importance of using only SFC-licensed platforms for transactions to ensure compliance with statutory regulatory requirements and avoid potential fraud.

The regulatory net is widening to include OTC trading venues, prompted by their role in fraud cases involving unlicensed VA trading platforms. A proposed regulatory framework for OTC venues is imminent, reflecting the government’s commitment to comprehensive oversight of the VA ecosystem.

Simultaneously, consultations are ongoing for a legislative proposal on regulating stablecoin issuers. The proposed system requires qualified fiat-referenced stablecoin (FRS) issuers to obtain a license issued by the Hong Kong Monetary Authority (HKMA). The HKMA plans to introduce a sandbox arrangement, engaging with industry players to gather opinions on proposed regulatory requirements, aligning with a risk-based approach.

As the deadline for existing service providers approaches, the SFC is gearing up for enforcement work, including issuing notices and increasing publicity efforts. The crackdown on unlicensed VASPs is part of Hong Kong’s broader strategy to establish a well-regulated digital finance ecosystem, ensuring compliance and contributing to the integrity of the virtual asset market. This regulatory tightening aims to protect investors from the inherent risks of the volatile digital asset landscape while fostering a responsible and robust market development.