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Hong Kong has been one of the world’s biggest digital assets hubs for years, but in all that time, it hasn’t implemented any regulations to police the industry. This is set to change in 2023, with lawmakers passing a draft bill that introduces a licensing regime for virtual asset service providers (VASPs) that will take effect next year.

Hong Kong lawmakers passed the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 recently, introducing common financial regulations that apply to traditional finance in the Bitcoin world.

While announcing the passing of the bill, the Hong Kong Monetary Authority (HKMA) revealed the new regulations would take effect on June 1, 2023. This would give industry participants enough time to prepare themselves, said HKMA, the city-state’s central bank.

In a separate announcement, the Secretary for Financial Services and the Treasury, Christopher Hui, welcomed the new regulations, saying it would reinforce Hong Kong’s status as an international financial center.

“The amended Ordinance establishes an effective AML/CTF regulatory regime and fulfils the relevant international obligations. This in turn strengthens Hong Kong’s status as an international financial centre. For VA exchanges, a comprehensive and balanced regulatory framework can protect investors and promote responsible and sustainable industry development,” Hui stated.

Hui reiterated the need for industry participants to be given time to adapt to the new regime. While the VASP licensing regime will come into effect on June 1, authorities will offer a nine-month grace period “to give [VASPs] sufficient time to apply for a licence or undergo registration in accordance with the regulatory regimes.”

What will change for VASPs in Hong Kong?

Hong Kong’s status as one of the world’s biggest digital assets destinations has been growing in tandem with the city’s reputation as a financial center. Data from Chainalysis shows that it received $70 billion in the year to June 2022.

Regulators in the city have been striving to bring this surging market under their purview for some time now, albeit with little success.

The most prominent effort was a regulatory sandbox introduced by the Securities and Futures Commission (SFC) in 2019, which offered a voluntary licensing scheme for VASPs. In order to apply for a voluntary license, an exchange had to list at least one security token. The big catch was that once licensed, exchanges could only serve institutional investors, which in the city must have a portfolio of at least $1 million.

Only two exchanges opted into the regime—Hashkey Pro and OSL, with the latter operated by publicly—listed BC Technology Group.

With the new amendment, Hong Kong will finally allow exchanges to serve retail customers. They will also have to abide by the same anti-money laundering and counterterrorist financing rules that mainstream financial companies have been subject to for years.

VASPs must also comply with financial reporting requirements their traditional peers abide by. These include detailed reporting of their profits and losses and their liquid capital. They must also list all the wallet addresses where their customers’ assets are held.

One of the key targets of the new legislation is consumer protection. This year, the global digital asset industry has been rocked by a series of bankruptcies and collapses—from Celsius and BlockFi to Three Arrows Capital and, most recently, FTX—prompting regulators to rethink their approach to investor protection.

Hong Kong now demands VASPs meet requirements such as safe custody of client assets, avoid any conflict of interest, and secure insurance for their users’ assets. They must also submit their audited accounts regularly to the SFC.

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