Cryptocurrency exchange license in Hong Kong

Ahead of countries such as the United States and Switzerland, Hong Kong has been recognized as the top contender for “crypto-activity” in the 2022 World Cryptocurrency Readiness Report. This is unsurprising, as it is driven by a high density of blockchain startups and cryptocurrency adoption per capita. Hong Kong has adopted regulatory measures and supported blockchain innovations in an effort to become the world’s leading cryptocurrency hub. Initiatives include the Innovation and Technology Fund’s allocation of $67.2 million for blockchain projects. In addition, there is a 2019 directive from the Securities and Futures Commission (SFC) on placing security tokens and cryptocurrencies. Highlighting the e-HKD pilot program launched with the participation of 16 companies in May 2023, the Hong Kong Monetary Authority is delving into the use of blockchain in financial applications by highlighting the e-HKD pilot program. Hong Kong already has exchanges such as BitMEX, OKEx, and Bitfinex, which significantly strengthens the status of the SFC cryptocurrency license.

Advantages of Acquiring a Crypto License in Hong Kong

The clear regulation is due to the fact that Hong Kong provides a transparent regulatory framework for cryptocurrency operations.
Issues such as setting up a business are greatly simplified due to the positive business climate and solid legal system, as the procedure is simple and there is no capital gains tax on cryptocurrencies.
As a major financial center, Hong Kong provides companies with access to a wide range of investors and financing.
Due to strict compliance with regulatory requirements and high standards, all Hong Kong SFC cryptocurrency license holders will be able to attract more institutional investors and partners.
With numerous startups, events, and support networks encouraging innovation, the region is developing a thriving crypto ecosystem.
All companies will have access to scale globally, as Hong Kong is a gateway to Asian and international markets.

Hong Kong’s Crypto Regulation

Hong Kong’s approach to cryptocurrency regulation is meticulously managed by the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC), which establish a secure and compliant environment for crypto businesses.

HKMA

Focuses on virtual asset service providers (VASPs), enforcing AML and counter-terrorist financing measures, due diligence, and record-keeping.

SFC

Oversees licensing and compliance of crypto exchanges and trading platforms, emphasizing transaction security, customer protection, and AML standards.

Principal Regulations and Updates

Anti-Money Laundering and Counter-Terrorist Financing (AML/CTF) Act (Amendment 2022)

Enforces VASPs to adhere to AML/CTF regulations in line with FATF Recommendation 15.

Securities and Futures Ordinance

Regulates securities, futures, and stored value facilities, maintaining a structured financial instruments market.

SFC Guidelines for Virtual Asset Trading Platforms

Detail licensing, cybersecurity, investor protection, and compliance for crypto platforms.

SFC’s Tokenized Securities Offering Statement

Defines security tokens as “securities,” requiring compliance with statutory and regulatory standards, including the Code of Conduct for Persons Licensed or Registered with the Securities and Futures Commission.

SFC Crypto License in Hong Kong and Germany

To operate legally, it is necessary to obtain a cryptocurrency license from the Securities and Futures Commission (SFC), which Hong Kong has been obliging virtual asset service providers (VASPs) to do since 2023. For example, entities may not engage in such activities as services with virtual assets, declare the provision of such services, engage in regulated activities or advertise these services.

For comparative purposes, Germany’s approach to cryptocurrency licensing involves a detailed process with a focus on anti-money laundering and countering terrorist financing, which is in line with both the German and European regulatory frameworks. The requirements include proof of initial capital, a three-year business plan, and detailed information about the company’s directors, significant shareholders, and organizational structure. It is worth noting that all documents must be submitted in German. Below, we will consider in detail all the requirements for the SFC cryptocurrency license.

Requirements

Following the December 2022 updates to the Anti-Money Laundering and Counter-Terrorist Financing Act, Hong Kong introduced stringent regulations for cryptocurrency operations effective April 1, 2023. These rules mandate that all virtual asset service providers (VASPs) secure a Hong Kong SFC cryptocurrency license from the Securities and Futures Commission (SFC) for lawful operations.

Without this SFC cryptocurrency license, entities are forbidden from:

Offering virtual asset (VA) services.
Claiming to provide VA services.
Engaging in regulated VA service activities.
Advertising VA services.

Starting June 1, 2023, the SFC began accepting applications for crypto trading licenses, covering activities such as:

Facilitating buy or sell offers of virtual assets.
Introducing or connecting parties for virtual asset transactions.
Managing client funds or assets in relation to VA services.

Exempt from this requirement are platforms trading in financial instruments already under the Securities and Futures Ordinance (SFO) regulation. The licensing regime applies universally to crypto exchanges registered in Hong Kong under the Companies Ordinance (Chapter 622), including those operating abroad yet targeting Hong Kong residents.

Step-by-step Process of Obtaining a SFC Crypto License

Declare their intention to operate within the Hong Kong market.
Pass a comprehensive fit and proper test, assessing:

Criminal background.
AML/CFT history.
Financial health.
Educational and professional credentials.
Reputation, experience, and integrity.

Nominate at least two individuals qualified to manage VA services as responsible officers.
Secure approval for record or document storage locations as per regulatory requirements.

In addition, the Securities and Futures Commission (SFC) may impose special conditions for obtaining a license. According to Section 53ZRK of the Regulation, these include risk management, AML/CFT protocol, financial resources, and cybersecurity.

When applying for an SFC cryptocurrency license, it is necessary to ensure that applications comply with the procedures of the SFC, as well as payment of the fee.

Additionally, the director and beneficial owner must clear a compliance test, verifying:

No financial, international, money laundering, or terrorism financing crime convictions.
No bankruptcy or liquidation proceedings.

The initial application requires a detailed documentation package featuring:

Business activity description.
Legal entity information.
Officer details, including passport data and work experience.
Employee information for the planned business.

Required documents include:

Foreign passport copies for the director and beneficial owner.
An authorization letter.
A compliance commitment declaration. If a legal entity, incorporation documents and a completed declaration are also needed.

Hong Kong Crypto License Taxation

Exempted from the status of legal tender, bitcoin, and other decentralized digital currencies are recognized as “virtual goods” in Hong Kong. According to this classification, investors are not subject to capital gains tax if they conduct cryptocurrency transactions.

Crypto assets traded in the course of ordinary business operations are considered taxable income. For individuals, the maximum income tax rate is 16.5%, while for legal entities it is 15%.

In the Hong Kong taxation system, taxation applies to income earned within its borders. If the profit was earned outside its borders, it will not be subject to income tax.

Depending on the nature of the ICO (initial coin offering), there may be different tax implications for ICOs. The taxation features will differ if the ICO resembles an offer of securities (granting voting rights to investors, for example) or a futures contract for services/goods that promises future benefits.

FAQ

What sanctions can be imposed on the cryptocurrency business in Hong Kong?

First of all, these are significant fines and possible criminal penalties for violation of licensing requirements. If you operate without a proper license, the company’s management can face up to seven years in prison, as well as a fine of HK$5,000,000 (USD 640,000). There are established AML/CFT requirements, so non-compliance can result in a fine of HK$100,000,000 and 2 years in prison if the court finds the licensed VASP and responsible employees guilty. In addition, the SFC cryptocurrency license may be suspended or revoked, reprimanded, remedial measures taken, and a monetary fine may be imposed.

What steps are required to secure a crypto license in Hong Kong?

To secure a Hong Kong SFC cryptocurrency license, applicants must:

Demonstrate intent to operate in Hong Kong.
Pass a “fit and proper” test assessing criminal record, financial health, and professional qualifications.
Designate at least two individuals as qualified, responsible officers for virtual asset services.
Obtain approval for premises for record storage.
The application is processed by the SFC, which may impose specific operational conditions.

What tax rules apply to cryptocurrencies in Hong Kong?

Cryptocurrencies are subject to capital gains tax if traded as part of a business. Thus, there is a tax of 16.5% for individuals and 15% for legal entities, which are applied to the profits that were made within Hong Kong. Depending on whether the ICO is considered an offering of securities or a contract for future services, the taxation may vary.