With the increasing popularity of virtual currencies such as Bitcoin, Ethereum and Dogecoin, it is undeniable that virtual assets (“VA”) have had and will continue to have a lasting impact on the global economy.
This has sparked action from the regulators, with Hong Kong’s Securities and Futures Commission (“SFC”) being no exception. The SFC have already introduced regulations regarding VA trading with the virtual asset trading platform licence (“VATP Licence”), but 2025/26 will likely see further implementation with the formal introduction of an over-the-counter (“OTC”) VA licence (“VA OTC Licence”).
Traditional OTC Licensing
In accordance with the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), any person operating a money service, including over the counter (i) money changing service; and (ii) remittance service should be licenced with the Commissioner of Customs and Excise (“CCE”).
Traditionally a Money Service Operator Licence (“MSO Licence”) is required for remittance and withdrawals of fiat currency, but what about when VA are being remitted overseas or withdrawn from OTC in Hong Kong?
Currently, Hong Kong does not have a designated licensing regime for businesses that provide VA OTC services.
February 2024 Consultation Paper
On 8 February 2024, the Financial Services and the Treasury Bureaus (“FSTB”) released a consultation paper that proposed to expand the existing MSO licensing regime to cover VA OTC business operators (“Consultation Paper”).
The proposal suggested that VA OTC business operators would need to apply to the CCE for licences and satisfy the regulatory requirements as set by the CCE.
It is expected that the existing MSO Licence will serve as guidance for any implemented VA OTC Licence.
Regulatory Requirements
Some of the specific proposed regulatory requirements for a VA OTC Licence include:
- Establishing appropriate physical premises in Hong Kong for an VA OTC outlet, or providing a management office, correspondence address, and storage for books and records in Hong Kong for an online digital VA OTC platform.
- Appointing at least one qualified compliance officer and one money laundering reporting officer.
- Demonstrating operational competency through a robust corporate governance structure staffed with experienced and knowledgeable personnel for the business.
- Conducting the business prudently and responsibly to safeguard the interests of clients and the public.
- Engaging in the business with honesty and fairness, utilising the necessary skill, care, and diligence.
- Implementing effective risk management practices, including appropriate policies and procedures for addressing Anti-Money Laundering and Counter-Terrorist Financing (as well as cybersecurity) risks.
- Keeping accessible records of transactions and fund flows, and providing a comprehensive list of wallets used in the business operation to the CCE.
VA to VA exchanges
The Consultation Paper indicated that a VA OTC Licence would not permit the conversion of VA to VA, as such services are more likely to trigger the need to have a VATP Licence. However, it is anticipated that exchanges between VA and fiat currencies will be permitted.
Transitional arrangements
Any business currently providing VA OTC services involving remittance and exchanges will be given a transitional period of six months before the commencement of the expanded VA OTC Licence. During such time, these businesses will be free to continue offering their VA OTC services, provided that they have submitted licence applications to the CCE within the first three months of the six month transitional period.
Similar to licencing requirements for VATP Licences, the FTSB will grant a “deemed licence” for eligible pre-existing businesses that provide VA OTC services meaning they can continue their operations until the SFC formally grant or reject the VA OTC Licence application. If a pre-existing business that provides VA OTC services does not submit a VA OTC Licence application within the first three months of the six month transitional period, then the business will be required to close.
Final considerations
We can assess, with some certainty, what any implemented VA OTC Licence will look like. Over a year has passed since the Consultation Paper was released so businesses currently providing VA OTC services must be ready for changes to the current regulatory landscape. Businesses should, with the assistance of compliance professionals, restructure appropriately so that they will stand the best chance of being compliant with incoming requirements.
Separately, the SFC’s regulatory roadmap for Hong Kong’s VA announced on 19 February 2025 indicated that the SFC are set bring in a VA custodian licensing regime to enhance the security and safety for VA custody. The specifics surrounding the proposed licencing regime framework have not yet been announced, but we can expect guidelines surrounding VA custody to be publicised in the near future.
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This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.
