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As Hong Kong moves forward with its ambitious plans to regulate and support the digital asset industry, the Securities and Futures Commission (SFC) has issued a crucial reminder. The SFC Non-Contravention Period End for virtual asset trading platforms (VATPs) operating in Hong Kong under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (AMLO) will conclude on June 1, 2024. This marks a significant deadline for all VATPs to either obtain a license from the SFC or be classified as “deemed-to-be-licensed” applicants.

Failure to comply with the AMLO licensing requirements after this period could result in criminal charges and other regulatory actions. In this blog, we’ll explore what this means for virtual asset platforms and investors, and provide a call to action for those looking to navigate these regulatory waters with confidence.

As of September 2024, the Hong Kong Securities and Futures Commission (SFC) reported a significant increase in licensing applications from virtual asset trading platforms (VATPs) due to the approaching deadline. Approximately 75% of existing VATPs in Hong Kong have initiated the application process or made adjustments to meet compliance standards. This rush underscores the pressure on VATPs to finalize compliance steps by June 1, 2024, especially as SFC’s data indicates that 25% of platforms currently lack adequate AML/KYC frameworks. This compliance gap suggests that many VATPs still have critical improvements to make, especially around investor protections, to secure their licensing status before the SFC deadline.

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Key Takeaways

• Deadline: The non-contravention period for VATPs in Hong Kong ends on June 1, 2024. Platforms must obtain full licensing by then or risk facing criminal charges.
• Investor Caution: Investors should trade only on SFC-licensed platforms and regularly check the list of compliant platforms to avoid risks.
• Compliance Push: VATPs must prioritize client asset protection, implement strong KYC processes, and pass external assessments to secure full licensing.
• Inspections Ahead: The SFC will conduct inspections to verify compliance, focusing on asset safeguarding and KYC protocols.
• Final Warning: Platforms that fail to comply will be disqualified and may need to shut down operations.

What Is the Non-Contravention Period?

The non-contravention period, ending on June 1, 2024, has allowed VATPs operating in Hong Kong before the implementation of the new licensing regime in 2023 to continue providing services while working towards full compliance with the SFC’s licensing requirements. The authorities granted these platforms temporary status as “deemed-to-be-licensed” applicants, allowing them to operate for a limited period while they enhance their policies, systems, and controls to meet SFC standards.

Once the non-contravention period ends, all VATPs must either be formally licensed or meet the SFC’s regulatory requirements to continue operating. Those failing to meet these requirements will face enforcement actions, including potential criminal prosecution.

Investors: Proceed with Caution

The SFC has emphasized the importance of investor vigilance during this transitional phase. Investors should only trade with SFC-licensed VATPs, and the SFC urges the public to check its “List of Licensed Virtual Asset Trading Platforms“ before engaging with any platform.

It is crucial to remember that “deemed-to-be-licensed” applicants are not fully licensed. These platforms are in the process of complying with SFC regulations but have not yet demonstrated the full effectiveness of their policies, especially around know-your-client (KYC) protocols and safeguarding client assets. Thus, they might not ultimately receive a license, and investors should be aware of the risks.

Additionally, the SFC provides a “List of Closing-Down Virtual Asset Trading Platforms” to inform the public about platforms that have failed to meet regulatory standards and are winding down their operations. Investors should routinely check this list to avoid dealing with platforms that are no longer compliant.

Deemed-to-be-Licensed VATPs: The Compliance Push

For VATPs currently operating under the deemed-to-be-licensed status, the SFC’s reminder serves as a final call to action. These platforms, along with their ultimate owners, must fully comply with all SFC regulations before June 1, 2024. Failure to do so will not only disqualify them from obtaining a license but may also result in them having to cease operations altogether.

Key areas of focus include:

• Client Asset Safeguarding: Platforms must demonstrate secure and reliable custody solutions for client assets.
• KYC Processes: Comprehensive know-your-client systems must be in place to prevent fraud, money laundering, and terrorist financing.
• External Assessment Reports: Platforms must engage qualified external assessors to evaluate and certify their compliance with the SFC’s policies and procedures. The results of these assessments will be critical in determining whether a platform is granted a full license.

In the coming months, the SFC will conduct on-site inspections to assess each platform’s compliance. Inspectors will focus on client protection measures, paying particular attention to how platforms safeguard assets and implement KYC processes.

The End of the Deeming Arrangement: What’s Next?

The deeming arrangement, which allows VATPs to continue operating while working toward full compliance, is only a temporary measure. The SFC clearly states that any platform failing to meet regulatory standards for investor protection will have its application refused. If the SFC disqualifies a platform, it must submit a plan to wind down its business orderly. This plan will prioritize the protection of client interests.

Platforms must act now to avoid negative outcomes. The SFC’s message is clear: ensure full compliance with the licensing regime before the non-contravention period ends.

How PayCompliance Can Help

Navigating the complexities of Hong Kong’s virtual asset licensing regime can be challenging, but compliance is critical for VATPs to continue operating in this rapidly evolving market. PayCompliance offers expert guidance and comprehensive solutions to help platforms meet the SFC’s stringent requirements. Our services include:

• License Application Support: We guide you through the entire process, helping you prepare and submit your application while ensuring compliance with all regulatory standards.
• AML and KYC Compliance: We help you develop robust anti-money laundering (AML) and know-your-client (KYC) systems to satisfy SFC requirements.
• Ongoing Compliance Solutions: PayCompliance offers continuous support to ensure that your platform remains compliant with SFC standards, even after obtaining your license.

As the deadline for full compliance approaches, now is the time to take action. Contact PayCompliance today. Learn how we can support your platform through the licensing process. We also ensure you remain compliant with all regulatory requirements in Hong Kong.

Conclusion

The end of the non-contravention period for VATP marks a pivotal moment for Hong Kong’s digital asset industry. For VATPs, the SFC enforces non-negotiable licensing requirements, and non-compliant platforms risk shutdown. Investors, too, must exercise caution, ensuring they trade only on SFC-licensed platforms to protect their assets.

For VATPs navigating these challenges, partnering with a trusted compliance advisor like PayCompliance can make all the difference. We assist you from license application to ongoing regulatory support. Our goal is to help you succeed in Hong Kong’s competitive crypto market.