Since the first cryptocurrency Bitcoin was launched in 2009, the sector has been largely unregulated. Bypassing traditional financial institutions, operations lie mainly at the hands of users who transact peer-to-peer. However, in the past years, government and regulatory bodies, as well as financial institutions, have been keeping a close eye on the sector, especially amidst its instability recently. Hong Kong, for example, is set to impose stricter cryptocurrency regulations as it amends its Anti-Money Laundering and Counter-Terrorist Financing Bill 2022.

In a previous article by Bolder Group, we went over some of the key AML and CTF regulations that may affect cryptocurrency in Asian nations like Hong Kong, Singapore and the Philippines where we offer our fund administration services. Hong Kong, for example, ensures safe financial transactions through major legislation “Anti-Money Laundering and Counter-Terrorist Financing”.

Under the law, financial institutions and designated non-financial businesses and professions (DNFBPs) are mandated to:

  • perform customer due diligence requirements and record-keeping
  • provide these records to relevant authorities and regulatory bodies

In addition, the law regulates money services by licensing operators, trusts and company service providers. That was the 2018 amended version, which did not mention any regulations relating to cryptocurrency operations in Hong Kong. This year, an amendment bill is proposed to include the imposition of regulatory frameworks on virtual asset service providers (VASPs) and dealers in precious metals and stones (DPMS).

New VASP and cryptocurrency regulations in Hong Kong require providers to apply for licence from the FSC.

Existing cryptocurrency regulations in Hong Kong and the AML/CTF Amendment Bill

According to the Hong Kong government, ‘The legislative proposal is pertinent to our fulfilment of the relevant FATF obligations and will mitigate the risk of money laundering and terrorist financing in Hong Kong. This will safeguard the integrity of Hong Kong as an international financial centre, protect investors and add to our credibility as a trusted and competitive place to do business’.

‘As money laundering and terrorist financing (ML/TF) risks continue to evolve, so must our understanding and response’, wrote Carmen Chu in a letter addressed to financial institutions in Hong Kong. Chu is the Executive Director for the Hong Kong Monetary Authority’s Enforcement and AML division.

Hong Kong’s risk assessment report for 2022 acknowledged the vulnerability of virtual assets due to their borderless nature and the fact that they are designed to allow hidden beneficiary ownership. Many transactions, the report found, take advantage of jurisdictional arbitrage. As a result, VAs can become instruments for money laundering. Hence, the need for cryptocurrency regulations in Hong Kong.

As a matter of fact, in 2021 Hong Kong has already established the Cryptocurrency Stop Payment Mechanism to deter money laundering using the technology. Under the mechanism, the government requests ‘stop payment’ and ‘subscriber check’ from a cryptocurrency exchange when authorities identify crime funds channelled through the platform. This is regardless of the country where the exchange is based. In 2021, 738 stop-payment requests equivalent to HKD 29.3 million crypto-assets were processed. 

Five key points of the amendment bill affecting VA

  1. The Bill introduces a licensing regime for virtual asset service providers (VASPs) to impose mandatory AML/CTF obligations on the sector. An individual who intends to operate a virtual asset exchange in Hong Kong must secure a licence from the Securities and Futures Commission (SFC).
  2. Licensed VASPs must perform customer due diligence (CDD) and record-keeping requirements pertaining to AML and CFT regulations. Enhanced CDD must be implemented when a transaction involves a politically exposed person and a formerly politically exposed person, in accordance with FATF recommendations.
  3. The Bill also pushes for the regulation of VA-related advertisements and the imposition of fines and punishment to parties involved in fraudulent, deceptive or misrepresented VA transactions. Under the new Hong Kong regulation, individuals found guilty of fraudulent transactions through VAs like cryptocurrency may be fined up to HKD 10,000,000 and face a maximum ten-year jail term (Section 53ZRF).
  4. Under Section 53ZRK, VASPs applying for an operating licence in Hong Kong must have at least two responsible persons. The FCS has sixteen conditions for a licence granting, including the applicant’s financial resources, risk management procedures, internal AML and CTF policies, financial disclosure, VA listing and trading policies and cybersecurity, amongst others.
  5. A month after it has been granted a licence, a VASP must appoint an eligible auditor to perform required auditing functions. Section 53ZRZ subsection 3 also requires the associated entity to appoint auditors. Under subsection 1 of Section 53ZSB, the entity must submit annual financial statements and audit reports to the SFC.

Read the entire bill here: AML and CTF (Amendment) Bill 2022

How this affects crypto players

What does this new regulation in Hong Kong mean for cryptocurrency players? The short answer: more compliance requirements. Compliance is vital to ensure a service provider, an investor, a fund manager, etc. remains on the good side of the governing jurisdiction. This regulatory framework in Hong Kong may result in an additional reporting burden for crypto actors as stricter CDD and AML measures are imposed on VASPs as well as players.

With Bolder Group’s compliance solutions, though, crypto investors or crypto fund managers can stay laser-focused on growing their portfolio, amidst changing cryptocurrency regulations in Hong Kong.

Please contact our Hong Kong office to know more about our regulatory compliance solutions and crypto fund administration services.

Cryptocurrency — a young finance technology that has taken the world by storm since it was launched over a decade ago by a person or an entity, whose identity remains a mystery. So, what exactly is cryptocurrency, and is it the future of trading? 

Here are the answers to some of the most frequently asked questions surrounding cryptocurrency. 

Question 1: What is cryptocurrency?

Think about the U.S. dollar or Euros. These are traditional currencies circulating within a country’s jurisdiction. They are called fiat money, which is centralised, controlled and maintained by government bodies and banks and used for the exchange of goods and services.  

Now, imagine electronic money that has the power to purchase and sell assets; only they are decentralised and distributed exclusively via the Internet. That is what cryptocurrency, or crypto, does. Like traditional currencies, crypto is used as a medium to buy and sell goods, services, and assets. It is a hundred per cent digital — meaning it does not come in any physical form like traditional money and precious metals do.  

With cryptocurrency, anyone with an exchange account can transact in as fast as seconds, even intercontinental, without the help of third-party financial institutions, such as traditional banks.

Question 2: How does cryptocurrency work? 

Before you learn about how cryptocurrency works, first, you need to understand blockchain technology. Blockchain is the digital equivalent of a ledger in traditional accounting, but, instead of numbers and figures, blockchain records transactions through codes or cryptography. A block contains data of each crypto transaction: the public key (permanent code identifier) of the crypto sender and receiver, the amount of coins, the hash (unique identifier of the transaction) and the previous hash (the unique identifier of the immediate previous crypto transaction). That is why each block is linked, ergo blockchain. The chain is a digital database of all crypto transactions around the world.  

But how does crypto work? Cryptocurrency is very straightforward. First, you need to have a “wallet” — it’s an account you create on a cryptocurrency exchange that holds your virtual assets. When you have an account, you have to transfer money from your bank to your crypto wallet. With crypto coins, you can start purchasing goods and services from companies that accept crypto as a mode of payment. Or you may hold on to these coins, wait for their value to skyrocket — or moon — then sell them for profits.  

All your transactions — and others’ from all over the world — are recorded onto the blockchain. 

Question 3: What are the most popular cryptocurrencies?  

Currently, there are thousands of cryptocurrencies globally. The two most popular are:  

Bitcoin (BTC), which is the first cryptocurrency ever launched. This was created by a pseudonymous person or persons known as Satoshi Nakamoto in 2009. Bitcoin was created to give the public an alternative peer-to-peer digital payment system free from traditional banking or government regulations. As of mid-January 2022, Bitcoin remains the most popular and most valuable cryptocurrency, with a value of USD 42,776 per coin. Bitcoin is capped at 21 million coins, which means there will be no more than 21 million Bitcoins.  

Launched in 2015, Ethereum (ETH) is the most valuable crypto exchange behind Bitcoin. Ethereum coins are called ether, and as of early January 2022, each coin is valued at USD 3,788.64 US. Eth was used to buy the most valuable non-fungible token (NFT) Everydays – The First 5000 Days for USD 69 million.  

Considered the “silver to Bitcoin’s gold” is Litecoin (LTC), which is among the most valuable crypto coins as of January 2022. LTC has capped coins of 84 million. One LTC is worth USD 146.25 as of mid-January 2022.  

Other popular crypto coins are Binance Coin, Cardano, Tether and Solana.

Question 4: Are cryptocurrencies legitimate and legal?   

Although there is no single institution regulating decentralised finance (DeFi), many countries and brands have already accepted cryptocurrencies as legal tender. They are legitimately used in purchasing and selling investments.  

Giant brands that accept cryptocurrency as a form of payment include PayPal, AT&T, Tesla and Starbucks.  

Member countries of the European Union recognise cryptocurrency, as well as the United States, Canada, Australia and El Salvador, among others. However, some countries consider crypto illegal, such as China, Egypt and Qatar. 

Question 5: What are the risks of cryptocurrency?

Like with other investments, such as stocks, cryptocurrency has its fair share of risks. One of the things that financial experts are concerned about cryptocurrency is its volatility. Because cryptocurrency is decentralised, the users across the blockchain network determine the prices and trends of cryptocurrency. Sudden mooning and sharp losses in cryptocurrency have made the virtual asset world unpredictable. Those have become norms in the digital coins landscape. That is why crypto investors need to monitor their coin values regularly.  

Due to the surge in prices of cryptocurrency coins like BTC and ETH, digital assets have become a target for hacking. The good news is that blockchain technology inherently ensures investment security. The open-for-all ledger provides additional protection for investors, as well.  

Human error is also a risk associated with cryptocurrency. As the investor, and because cryptocurrency is virtually unregulated, you are solely responsible for storing your assets in your digital wallet, that is encrypted and secured with a private code. You will need this code, usually a long pass key that is shortened to a 12-word seed phrase, to access your wallet and make transactions. If you forget this key phrase, you will most likely lose your investment. 

Question 6: How do I protect myself from the risks of cryptocurrency?

There are many ways to protect yourself from the risks of cryptocurrency. One is to use a “Cold Wallet”. This is a hardware wallet where you can store your private keys to crypto. This wallet can reduce the risk of cyberattacks.  

Don’t use public networks when making crypto transactions. If you are using a secure home network, a VPN will add a layer of digital protection for your coins, as it changes your location and IP address.  

Our team here at the Bolder Group has the knowledge and experience as corporate & fund administrator of cryptocurrencies and can provide you with relevant information regarding structuring and administration of crypto funds and investment vehicles. 

To know more about cryptocurrency and our crypto fund administration services, consult with us today.  See our locations here to get in touch with the Bolder Group.