Financial Crime World

Hong Kong’s Legislative Council Passes Anti-Money Laundering Laws for Digital Currencies

The Hong Kong government has taken a significant step towards strengthening its anti-money laundering (AML) and counter-terrorist financing (CTF) regulations by passing the “Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022” on December 7, 2022. The new law will come into effect on April 1, 2023.

Purpose of the Amendment

The amendment aims to fulfill Hong Kong’s international obligations under the Financial Action Task Force (FATF), following a mutual evaluation conducted by the FATF in 2019. The new regulations are designed to prevent the misuse of digital currencies and ensure that cryptocurrency exchanges operating in Hong Kong comply with AML/CTF requirements.

Key Requirements for Cryptocurrency Exchanges

  • All cryptocurrency exchanges operating in Hong Kong will be required to obtain a license from the Securities and Futures Commission (SFC).
  • Applicants must pass a “fit and proper” test, including demonstrating relevant experience and qualifications as virtual asset service providers (VASPs), as well as showing good standing and financial integrity.
  • Licensed VASPs will be subject to AML/CTF requirements, including:
    • Customer due diligence
    • Record-keeping obligations
    • Rigorous criteria for the inclusion of digital currencies on their exchange platforms
    • Segregation of client assets
    • Compliance with financial reporting and disclosure obligations

Penalties for Non-Compliance

  • Fines of up to HK$5 million
  • Imprisonment of up to seven years
  • Daily fines of HK$100,000 may also be imposed for continuing offenses

Implications for Cryptocurrency Exchanges

  • All cryptocurrency exchanges operating in Hong Kong will be required to obtain a license from the SFC.
  • Only professional investors may trade on licensed exchanges, and retail trading is not permitted.
  • The law covers centralized cryptocurrency exchanges but excludes over-the-counter (OTC) transactions if neither tokens nor funds are handled by the exchange.

Pathway for Regulatory Compliance

The new regulations provide a pathway for regulatory compliance for cryptocurrency exchanges and other VASPs, should the definition of VA services expand in the future. The amendment is seen as a significant step towards establishing Hong Kong as a regional hub for the digital currency industry.