Hong Kong crypto firms face shutdown risk under licensing rules

AI investment platforms and paid online influencers could face closer scrutiny.

Banks, cryptocurrency firms, and asset managers in Hong Kong could be forced to suspend virtual-asset (VA) services if they fail to obtain licences before proposed regulations take effect, lawyers said.

“Licensed VA custodians will face demanding requirements in relation to matters such as private key management, cybersecurity, and governance,” Emily Rumble, a senior lawyer at Gibson, Dunn & Crutcher LLP, said in an emailed reply to questions.

Existing operators would not automatically be exempt from the proposed rules or be allowed to continue affected services whilst their licence applications are being reviewed, she pointed out.

Hong Kong's government said in May it was finalising proposals to require separate licences for virtual-asset dealing, custody, advisory, and management services under the Securities and Futures Commission (SFC). It aims to introduce legislation before year-end.

William Hallatt, a partner at Gibson, Dunn & Crutcher, said banks and licensed asset managers have relied on regulatory guidance and conditions attached to existing licences to offer virtual-asset services.

The proposed rules could also cover over-the-counter trading desks, brokers, and payment service providers, although their precise scope remains uncertain.

Hallatt said restrictions on trading through platforms not approved by Hong Kong regulators could prompt some firms to shift operations overseas.

Isabella Wong, a financial services partner at Deacons, said asset managers would need separate licences to manage virtual assets even when these represent less than 10% of their portfolios.

Fund managers might need to hire qualified staff and change their operating procedures to comply, she said.

"It will take time to hire qualified responsible officers with VA-related experience and implement new operational arrangements for the existing funds or portfolios," Wong said in an emailed reply to questions.

Minny Siu, a partner at King & Wood, said banks, brokers, and asset managers providing custody services might need to boost cybersecurity, technology, and internal controls.

Some firms could instead use licensed custodians or trading platforms to avoid building their own systems, she said.

Kristi Swartz, a partner at DLA Piper Hong Kong, warned that outsourcing would not relieve firms of responsibility for complying with anti-money laundering rules.

Wong said the proposed advisory licensing requirements could also cover artificial intelligence investment platforms offering cryptocurrency recommendations or model portfolios, as well as paid online influencers promoting virtual assets.

Overseas companies actively marketing virtual-asset services to Hong Kong customers might also need licences, Swartz said.

She advised foreign firms to review their websites, advertising, and customer restrictions to determine whether they would fall under the proposed rules.