Hong Kong's Financial Services Department has issued a strict ultimatum to unlicensed virtual asset service providers (VASPs), declaring that they must close operations by May 31, 2024. The move comes as part of the government's robust regulatory approach to virtual assets, emphasizing risk-based and prudent oversight.

As of February 29, 2024, unlicensed VASPs in Hong Kong were given a final opportunity to submit license applications if they wished to continue operations. 

Christopher Hui, a representative of the financial services department, stressed the importance of adhering to the principle of "same activity, same risk, same regulation." 

“Hong Kong’s approach to VAs focuses on risk-based, prudent regulation,” Hui said in a statement. “By adhering to the principle of “same activity, same risk, same regulation” and implementing comprehensive regulation, we seek to address the risks associated with VA activities in terms of investor protection and money laundering and terrorist financing (ML/TF).”

The comprehensive regulatory framework aims to mitigate risks related to investor protection money laundering and terrorist financing.

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Transition Period and Licensing System Overview

The licensing system and regulatory requirements for Virtual Asset Service Providers (VASPs) commenced operations on June 1 of the previous year. Two licensed VA trading platforms currently offer Bitcoin (BTC) and Ethereum (ETH) trading services to retail investors. 

According to Hui, these licensed platforms are subject to rigorous regulation by the Securities and Futures Commission (SFC), providing substantial protection for investors.

VASPs operating before the licensing system's implementation were granted a transitional period to accommodate their transition. To continue operations in Hong Kong, these service providers were required to submit license applications by February 29, 2024. 

Prior to the licensing system's implementation, the SFC will assess whether they meet regulatory requirements and have substantial operations in Hong Kong. For service providers failing to meet requirements, a "No-deeming notice" will be issued. 

Those who do not submit applications by February 29 or receive a notice must cease operations by May 31, 2024, or within three months from the notice's issuance.

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Regulation of Over-the-Counter (OTC) Venues and Future Consultations

The regulatory scope will expand to include over-the-counter (OTC) venues, with a proposed regulatory framework set for consultation. OTC venues reportedly played a role in fraud cases involving unlicensed VA trading platforms, prompting this move.

Also, the Hong Kong Monetary Authority (HKMA) is consulting with the public on a legislative proposal for stablecoin issuer regulation. HKMA will introduce a "sandbox" arrangement to gather opinions on proposed regulations.

Meanwhile, Bybit cryptocurrency exchange has applied for a Virtual Asset Trading Operator (VATP) license with the Hong Kong Securities and Exchange Commission (SFC). The SFC is reviewing 14 similar VATP applications, reflecting the industry's active engagement with regulatory compliance.