Hong Kong Regulator Urges Banks to Support Regulated Virtual Asset Service Providers

In a circular promoting access to banking services for corporate customers, the Hong Kong Monetary Authority (HMKA) has urged banks to provide services to licensed virtual asset service providers (VASPs). Specifically, the regulator encourages authorized institutions (AIs) to adopt “a forward-looking approach” to strengthen their understanding of new and developing sectors.

The new guidance comes ahead of Hong Kong’s new VASP licensing regime, which is due to commence in June 2023. 

Access to Banking Services

As part of Hong Kong’s push to become a global crypto hub, the HKMA says AIs should avoid a “wholesale de-risking approach” that could exclude new industries or certain nationalities from specific products and services. Instead, firms should ensure legitimate businesses have fair access to services by understanding the risks and implementing responses consistent with a risk based approach. To ensure this understanding is shared across an organization, the regulator notes the importance of providing staff with relevant training and up-to-date information.

Additionally, the HKMA outlines the following action points for AIs to support the digital-asset sector:

• Review all account opening procedures and customer due diligence (CDD) measures.
• Support the Tiered Account Services initiative that promotes financial inclusion in Hong Kong.
• Offer “Simple Bank Accounts” to meet the needs of small and medium-sized enterprises (SMEs) and start-ups that only require basic banking services, such as payroll. 

Hong Kong’s VASP Licensing Scheme

In December 2022, the Legislative Council of Hong Kong passed an amendment to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), introducing a licensing regime for VASPs. The update aligns with Recommendation 15 set out by the Financial Action Task Force (FATF), which requires VASPs to be regulated for anti-money laundering and countering the financing of terrorism (AML/CFT) purposes. According to the FATF, VASPs should also be licensed and subject to effective systems for monitoring or supervision.

Under the amended AMLO, VASPs will need to:

• Apply for a license from the Securities and Futures Commission (SFC).
• Satisfy the “fit and proper test” and comply with anti-money laundering and counter-terrorist financing (AML/CTF) requirements, such as customer due diligence (CDD) and record-keeping.
• Regularly submit audited accounts and financial information to the SFC.
• Appoint at least two responsible officers who will be generally responsible for overseeing the operation of the licensed VASP and ensuring compliance with the AML/CTF and other regulatory requirements.

The regime was initially scheduled to go live on March 1, 2023. However, the HKMA has since moved the date to June 1, 2023, to provide VASPs with more preparation time. Once in operation, retail investors in Hong Kong will be able to trade major tokens, including Bitcoin and Ether. Hong Kong’s largest virtual bank, ZA Bank Ltd., also plans to offer token-to-fiat currency conversions over licensed exchanges.

Key Takeaways

Compliance teams should ensure they review the circular’s annex, which details key observations and good practices related to onboarding corporate customers. Some of the expected standards identified by the HKMA include the following:

• Establishing guidelines and control measures to ensure customers’ applications are processed promptly and appropriately.
• Communicating expected timeframes to applicants and providing them with updates if their application has been delayed. 
• Only conducting additional CDD measures when offering correspondent services to international VASPs. (AIs are not required to perform additional CDD measures on SFC-licensed VASPs.)
• Conducting customer risk assessments that consider various risk factors instead of automatically applying enhanced due diligence (EDD) on customers from jurisdictions on the FATF grey list.