User:CryptoLegend/Cryptocurrency Regulations in Hong Kong

Cryptocurrency regulations in Hong Kong refer to the legal framework and guidelines set by the government of the Hong Kong Special Administrative Region (HKSAR) in relation to the use, trading, and taxation of cryptocurrencies. As of 2023, there is no specific legislative framework in Hong Kong which regulates crypto-assets and therefore no single regulatory body governs such crypto-assets. However, several financial regulatory bodies, such as the Securities and Futures Commission (SFC), the Hong Kong Monetary Authority (HKMA), and the Insurance Authority (IA), have provided guidance pertaining to crypto-assets.

Securities and Futures Commission (SFC)
The Securities and Futures Commission (SFC) of Hong Kong is the primary regulatory authority responsible for overseeing the securities and futures markets, including cryptocurrency-related activities. If a crypto-asset has characteristics of a security as defined under the Securities and Futures Ordinance (SFO) then it will be regulated by the SFC as a security in accordance with the SFO and other relevant laws and regulations. If a crypto-asset meets the requirements to be considered a security, the Hong Kong law controlling the offering and marketing of financial goods will also apply. The laws governing regulated operations (which require licensing and authorization) may also apply to cryptoassets that are securities.

Under the SFC's regulations, any company that provides services involving virtual assets may be subject to the licensing requirements set out in the Securities and Futures Ordinance (SFO). These services include virtual asset trading platforms, asset portfolio management, fund distribution, and advisory services. Licensed virtual asset trading platforms are subject to additional requirements, such as anti-money laundering and know-your-customer obligations.

Additional regulatory guidelines for actions involving cryptoassets have also been provided to regulated firms by the HKMA and the SFC, including:


 * the HKMA's guidance to authorized institutions (which includes licensed banks) on the regulatory approaches to authorized institutions' engagement with crypto-assets and crypto-asset service providers; the SFC's regulatory statement and associated licensing terms to Hong Kong licensed asset managers in relation to managing and distributing funds that invest in virtual assets; and
 * the HKMA-SFC joint circular on the dealing and consulting services linked to virtual asset distribution of products.
 * At the moment, the regulatory framework governing virtual asset trading platforms (VATP) functions on a "opt-in" basis.  By providing to trade at least one token on its platform, a centralized VATP can "opt-in" to regulation.

On November 3, 2020, the chief executive of the SFC said that Hong Kong would soon regulate all cryptocurrency trading platforms, regardless of if they trade securities. Before this, platforms operating in Hong Kong that offered trading of at least one security token had the option to be licensed by the SFC.

Anti-money laundering and counter-terrorist financing
To prevent money laundering and counter-terrorist financing, Hong Kong has implemented regulations aligned with international standards. The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO) requires virtual asset service providers (VASPs) to conduct customer due diligence and report suspicious transactions to the relevant authorities. VASPs are also required to be licensed by the SFC or registered as Money Service Operators (MSOs) with the Customs and Excise Department.

Hong Kong’s Legislative Council passed the anticipated “Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022” (Amendment) on 7 December 2022. The legislation was published on 16 December and came into operation on 1 April 2023. This bill amends the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (AMLO) currently in operation in Hong Kong.

The Amendment made SFC the regulatory authority over virtual asset service providers (VASPs) for AML/CTF compliance matters. This plugs a hole in SFC’s regulatory reach since the Securities and Futures Ordinance (Cap. 571) (SFO) only provides it with authority over “securities” and arguably, most cryptocurrencies do not fit under the definition of “securities” as defined in the SFO. The Amendment also expanded regulations of dealers in precious metals and stones under the authority of the Hong Kong’s Customs and Excise Department, the traditional regulator of AML/CTF activities in Hong Kong.

Any person (including financial institutions, virtual commodity dealers or operators) is required to report any suspicious activities in relation to money laundering or terrorist financing to the JFIU set up by the Police and the C&ED in Hong Kong. A failure to disclose suspicious transactions to the JFIU may amount to an offence. The applicable ordinances include:


 * 1) the Organized and Serious Crimes Ordinance (Cap. 455),
 * 2) the Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405); and
 * 3) the United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575).

In January 2014, the SFC issued a circular reminding licensed corporations (LCs) and associated entities (AEs) to take all reasonable measures to ensure that proper safeguards are in place to mitigate their existing AML/CTF risks. Virtual commodities that are transacted or held on an anonymous basis inherently present significantly higher AML/CTF risks.

The SFC in its September 2017 statement, cautioned investors that they may be exposed to increased risks of fraud arising from ICOs, given that these arrangements and the parties involved operate online and may not be regulated.

Initial Coin Offerings (ICOs)
Hong Kong has taken a cautious approach towards initial coin offerings (ICOs). While ICOs are not banned outright, the SFC has issued guidelines and statements to clarify the regulatory requirements for ICO issuers and intermediaries. The SFC considers some ICO tokens to be securities and thus subject to the existing securities laws in Hong Kong. ICO issuers are required to comply with the applicable registration, licensing, and prospectus requirements.

Taxation
Hong Kong has adopted a territorial tax system, meaning that only profits derived from a trade, business, or profession carried on in Hong Kong are subject to taxation. Cryptocurrency transactions are generally treated as capital gains and are not subject to income tax. However, if an individual or company engages in cryptocurrency-related activities as a trade or business, the profits derived may be subject to profits tax.