Countering risks of over-the-counter virtual asset service providers: A new proposed regime

On 8 February 2024, the Financial Services and the Treasury Bureau issued a consultation paper to seek comments on proposed further amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) in order to regulate over-the-counter trading of virtual assets. 


Recent fraud cases involving virtual assets trading platforms (“VATP”) have caused public concerns over the risks associated with over-the-counter ("OTC") trading of virtual assets ("VAs") to manifest themselves. The Financial Services and the Treasury Bureau ("FSTB") has reacted by proposing to further amend the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) ("AMLO") to regulate OTC trading of VAs, and issued a consultation paper on 8 February 2024, seeking comments by 12 April 2024.

OTC trading of VAs is a form of trading which mostly occurs on a peer-to-peer basis between two principal parties rather than through a traditional exchange. Pure peer-to-peer trading of VA without involving an intermediary operating a VA OTC business is not caught by the draft legislation.

What is the content of the proposed legislation?

The proposed rules will take the form of amendments to the AMLO.

Under the proposed regime, any person who conducts a business of providing spot trading services  for any VA in Hong Kong is required to be licensed by the Commissioner of Customs and Excise ("CCE"), and as part of the licensing process, subject to a fit-and-proper test as well as other criteria deemed relevant by CCE.

Similar to the VATP licensing regime (as set out in our publication in June 2023) and the licensing regime under the Securities and Futures Ordinance (Cap. 571), the FSTB proposes to prohibit the active marketing of a regulated VA OTC service by unlicensed parties to the Hong Kong public, whether in Hong Kong or elsewhere.   

Definition of VA OTC business

It is proposed that a VA OTC business will be defined as –

  • by way of business, provision of spot trading services for any VA;
  • irrespective of whether the services are provided through a physical outlet (i.e. including shops or ATMs) or other platforms (e.g. digital); and
  • explicitly excluding the operation of a VATP as already covered under the VATP licensing regime (for more information about the VATP licensing regime, please see our earlier publication).
Key aspects of proposed rules
  • A licence applicant must be:
  1. a locally incorporated company with a permanent place of business in Hong Kong, or
  2. a company incorporated elsewhere but registered in Hong Kong under Part XVI of the Companies Ordinance (Cap. 622).
  • For bricks-and-mortar service providers, an applicant will be required to identify suitable premises. For digital online only services, an applicant will be required to provide an address of a local management office, correspondence address and place for local storage of books and records.
Fit-and-proper test

The CCE will look at all relevant matters including the following when determining whether an applicant is fit-and-proper, such as convictions for money laundering / terrorist financing, fraud or other serious offences in Hong Kong or elsewhere, and any record of failing to observe anti-money laundering / counter-terrorist financing requirements.

Activities allowed

Licensees will be able to perform spot trading of particular VAs for fiat currency or vice versa.

The scope of permitted VAs is tokens which may be accessed by retail investors on at least one SFC-licensed VATP or stablecoins issued by licensed issuers (subject to the implementation of the relevant regime).

The remittance of exchange proceeds is allowed, but will require a separate money service operator licence.

The following activities are prohibited:

  • Trading which relates to conversion from one VA to another VA (as this falls under the ambit of a VATP licence).
  • Provision of VA advisory or referral services.
  • Offering of VA derivatives or other financial products.
Competence/governance requirements

Licensees will be required to:

  • appoint a competent Compliance Officer and a Money Laundering Reporting Officer;
  • have a proper corporate governance structure staffed by personnel with the necessary knowledge of and experience with VA;
  • operate their business in a prudent and sound manner;
  • act honestly, fairly, with due skill, care and diligence, in the best interests of their clients and the integrity of the market;
  • have in place appropriate risk management policies and procedures for managing money laundering/terrorist funding and other risks; and
  • maintain proper records of transactions and fund flows, which will be accessible to CCE as and when CCE considers necessary.
Transitional period

The FSTB proposes to provide a transitional period for VA OTC operators carrying on business in Hong Kong immediately before the commencement of the regime. There are currently two options under consideration:

  • “No Deeming Arrangement”, i.e. a transitional period of six months where pre-existing VA OTC service providers may carry on their operations if they apply for a VA OTC licence within the first three months. Should any such pre-existing service provider fail to apply for a VA OTC licence within three months, they are to be closed down.
  • “With Deeming Arrangement”, i.e. a transitional period of six months where pre-existing VA OTC service providers will be allowed to continue operations if they apply for a VA OTC licence within the first three months. For those applicants that are able to meet the requirements specified by CCE, a "deemed licence" will be granted in the interim for them to continue their operations beyond the transitional period and until a final determination of the licence applications is made by CCE.

Key Takeaways

Given the recent damage to the perceived integrity of the market due to fraudulent activities relating to VAs, the proposed VA OTC licence regime is a welcome move towards enhancing confidence in VA services in Hong Kong. 

However, it is important here to note that “fraud is fraud” and fraud relating to VAs has more to do with the intent and integrity of those operating VA-related businesses than the nature of VAs themselves. This new legislation is another key piece in the puzzle in moving Hong Kong in the direction of its stated goal of becoming a regional VA trading hub. The key question will be whether the proposed regime strikes the right balance.

The VATP licensing regime, which came into effect last year, has been reasonably well received, attracting around 20 applications so far. It remains to be seen how leading market players in the OTC space who were previously unregulated and who historically fed customers to the platforms which are now being licensed under the VATP licensing regime will view the proposed VA OTC regime: as a welcome step forward in creating an orderly regulated market in VA which is market integrity positive, or as imposing increased compliance costs and burdens on a previously unregulated sector with a degree of uncertainty over the transitional arrangements for licensing of existing players. 



Authored by Andrew McGinty and Katherine Tsang.


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