Have you really considered the consequences of the "tiger skin" trading of encrypted assets?

Since the end of 2022, Hong Kong began to declare that it embraces virtual assets and prepares to build a world virtual asset center. It has made a series of arrangements in terms of legal norms and systems, hoping to get rid of the dross and extract the essence, and put virtual assets in the "cage" of financial supervision. ", to maximize the risk control of virtual assets and provide protection for financial consumers as much as possible. Considering that the relevant pricing mechanism of most virtual assets is highly dependent on market sentiment, and there is information opacity in multiple links such as issuance and circulation, Hong Kong has decided to include virtual assets into the existing "licensing" financial regulatory system.

In order to achieve the above objectives, the Legislative Council of Hong Kong completed the latest revision of the "Anti-Money Laundering and Counter-Terrorist Financing Ordinance 2022" (hereinafter referred to as the "Anti-Money Laundering Ordinance") on December 7, 2022. Asset service providers (Virtual Asset Service Provider, hereinafter referred to as "VASP") have tailored a licensing system, which will be officially implemented on June 1, 2023. Since then, the Hong Kong Securities Regulatory Commission has repeatedly emphasized in legal norms, normative documents, and guiding documents such as the "VASP Consultation Summary" and "Guidelines for Operators of Virtual Asset Trading Platforms":** "Unlicensed activities in Hong Kong are criminal offense"**.

Today, Sister Sa’s team will start from a series of improper business practices by some virtual asset practitioners in Hong Kong recently, and talk to you about the legal risks that these behaviors may cause.

01 Introduction to the current Hong Kong VASP licensing system

As mentioned earlier, operating a regulated VASP business in Hong Kong must hold a corresponding license. Currently, Hong Kong regulators provide virtual asset practitioners with two sets of VASP licenses to choose from.

The first type is "VASP" license plate. According to Section 53ZRD of the Anti-Money Laundering Ordinance, any person who operates a business that provides virtual asset services or shows that he is operating such a business must apply for a license from the SFC. Also, according to section 53ZRB of the Anti-Money Laundering Ordinance, any person who actively promotes to the public any service he provides that would constitute a virtual asset service if provided in Hong Kong will be deemed to be providing virtual asset services.

The second category is the traditional "Financial Supervision" license (No. 1 and No. 7 licenses). Some virtual asset practitioners believe that after the "Anti-Money Laundering Ordinance" takes effect on June 1, 2023, the Hong Kong Securities Regulatory Commission's previous measures to include virtual asset trading platforms in the traditional 12 types of financial license supervision will no longer apply to the VASP business. The Hong Kong Securities Regulatory Commission has made it clear in subsequent explanatory documents: "Virtual asset trading platforms that intend to provide security token trading services will be required to obtain Type 1 and Type 7 licenses in accordance with the Securities and Futures Ordinance." A license for regulated activities." For example, if you want to operate an unpretentious virtual currency trading platform in Hong Kong without any financial operations attached to it, then you only need to apply for a "VASP license" to be compliant ** But if you want to "empower" this trading platform and use virtual currency (or other virtual assets) as a financial product similar to securities, then you must apply for a "VASP license" and a No. 1 license at the same time. card, No. 7 **** card. **

02 Unlicensed institutions falsely claim to be licensed and engage in VASP business

Recently, the Hong Kong Securities Regulatory Commission has noticed that some virtual asset practitioners have illegal operations, and issued a related warning article "Warning: Virtual Asset Trading Platform with Improper Operations". The article pointed out that some unlicensed VASPs falsely claimed that they were licensed and operated VASP business and sold virtual assets to the Hong Kong public through false propaganda.

This behavior is extremely dangerous and has been suspected of crime. Pursuant to Section 53ZRG of the Anti-Money Laundering Ordinance:** Any person who makes any fraudulent misrepresentation or recklessly Misrepresentation of fact is an offense****. **Anyone who commits the relevant offense: (1) upon conviction on indictment, is liable to a fine of $1,000,000 and to imprisonment for seven years; or (2) upon summary conviction, to a fine at level 6 and to imprisonment for six months.

With reference to the case of Wei Moumou and Zhang Moumou’s unlicensed activities announced by the Hong Kong Securities Regulatory Commission in 2023, the two claimed to be from April 2016 to June 2017 without being licensed by the Hong Kong Securities Regulatory Commission. Agents of two U.S. financial companies improperly induced three retail investors to invest in shares of so-called "U.S.-listed" companies, which subsequently fell sharply. The Eastern District Magistrates' Court ruled on July 5 and July 27 that the two constituted a crime and imposed penalties.

03 Applied but not yet licensed, improperly operating VASP business

In addition to the above-mentioned improper business practices of falsely claiming to be licensed and operating VASP business without applying for relevant licenses, there is another part of practitioners who have indeed applied for licenses and established legal entities to operate VASP business before the "Anti-Money Laundering Regulations" was revised. , but is not currently licensed. Such entities also exaggerate facts and operate in violation of regulations in the process of operation.

According to the "Circular on the Transitional Arrangements for the New Licensing System for Virtual Asset Trading Platforms" issued by the Hong Kong Securities Regulatory Commission at the end of May, before the revision of the "Anti-Money Laundering Ordinance", Hong Kong's original virtual asset trading platforms meet the following requirements: Conditions, from June 1, 2024, it can be regarded as a licensed VASP engaged in the provision of virtual asset services (quasi-licensed VASP):

| | | | | --- | --- | --- | | | Content | Legal Basis | | Condition 1 | During the period from June 1, 2023 to February 29, 2024 (that is, within the first nine months starting from June 1, 2023), the virtual asset trading platform, through WINGS Submit a fully completed license application to the SFC online. | S.53ZRK AMLO | | Condition 2 | The virtual asset trading platform confirmed in the license application: (1) It is providing virtual asset services in Hong Kong immediately before June 1, 2023; (2) It will be on June 1, 2024 (3) Arrangements have been made when it is deemed to be licensed on June 1, 2024 to ensure that it complies with the regulatory requirements applicable to licensed virtual asset trading platforms; Regulatory requirements applicable to licensed virtual asset trading platforms; | Section 53ZTO(1) of the Anti-Money Laundering Ordinance; Section 3(1)(b)(ii), Section 3G of Schedule 3G to the Anti-Money Laundering Ordinance Section 1 and Section 3(1)(b)(iii)(A) | | Condition 3 | The virtual asset trading platform can prove and satisfy the CSRC in its license application. | Section 3(2) of Schedule 3G of the AMLO|

However, Sister Sa’s team reminded that the approved licensed VASP is not a licensed VASP, and it is not allowed to directly claim to be a licensed institution in external publicity. **In addition, the quasi-licensed VASP is an entity that is working hard to obtain a license and is doing compliance construction. Every license is hard-won. The China Securities Regulatory Commission has made it clear. There have been some non-compliant activities which the SFC will consider whether they could reasonably have been avoided. VASPs should not be too aggressive before success, so as not to be identified as "unqualified applicants" by the China Securities Regulatory Commission and reject the application because of small losses.

So, what about the quasi-licensed VASPs that have improperly operated and exaggerated their propaganda? Sister Sa's team believes that if the current quasi-licensed VASP conducts improper business activities due to "negligence" due to unfamiliarity with the laws and regulations, there is no need to panic too much, as long as the compliance rectification brings its business back on track, it will be fine. It will not have a serious impact on the subsequent issuance of licenses. ** As the saying goes, it is never too late to fix the problem, and when assessing license applications for virtual asset trading platforms, the SFC will also consider whether they can demonstrate a genuine intention to rectify non-compliant activities, including phasing out non-compliant activities in an orderly manner. Allowed transactions, stop hype, etc.

04 Written at the end

For financial consumers, a series of supervision measures by the Hong Kong Securities Regulatory Commission are very helpful to protect their investment interests. Compared with other unmanaged VASPs, licensed VASPs are subject to more restrictions on transactions and other aspects, but these restrictions also largely reduce the risk of investors. Sister Sa's team recommends investors, especially non-professional investors** to choose a licensed VASP for trading**. Currently, platforms licensed in Hong Kong and capable of trading securities-type virtual assets can be approved by the Hong Kong Securities Regulatory Commission. Check the "List of Virtual Asset Trading Platforms" on the official website. Non-professional investors must do their homework before investing.

The above is today’s sharing, thank you readers!