The legislative council of Hong Kong has approved an amendment to its anti-money laundering (AML) and terrorist financing system that now includes providers of virtual asset services.
With effect starting on June 1, 2023, the latest legislation will create a new licensing system for service providers of virtual assets. The new amendment will regulate crypto exchange service providers by the same laws as conventional financial institutions.
This implies that before receiving a license to operate, virtual exchanges seeking to establish a business in Hong Kong will be subject to stringent AML regulations and investor protection rules. Hong Kong’s regulators, in contrast to most others around the world, have reduced the regulatory risks connected with centralized exchanges by leveraging the collapse of the crypto exchange, FTX.
Regulators from all around the world have come under fire from the public for failing to protect small investors after FTX collapsed. There has been an increase in demand to regulate cryptocurrency exchanges and service providers, subject them to severe AML requirements, and ensure investor safety.
Eddie Yue, the chief executive of the Hong Kong Monetary Authority, suggested that the country may soon adopt investor protection measures during a recent conference. The nation has taken the lead in addressing the urgent problem of investor protection thanks to the latest legislative revision.
In order to lay a sound legal foundation for the emerging cryptocurrency industry, Hong Kong proposed a regulatory framework and risk-based regulatory direction. A variety of pilot projects have also been proposed by the government to assess and enhance the technologies underlying virtual assets (blockchain).
The Hong Kong Monetary Authority (HKMA) recently stated that the instability of crypto assets, particularly asset-backed stablecoins, could potentially affect the traditional financial system.
The central bank of Hong Kong argued that the vulnerability of the crypto ecosystem to systemic shocks has increased as a result of the interconnection of crypto assets. Furthermore, the increased exposure of financial institutions to cryptocurrencies may make them more vulnerable to spillover effects from abrupt swings in price.