Crypto License in Hong Kong

Progressive regulatory environment.
There is a clear indication of what type of activity falls under the issuance of a Hong Kong crypto license and what does not, as well as outlined requirements for companies to legally conduct their business. Obtaining a license is evidence that the company complies with all global standards of the financial industry.

World Financial Hub.
Legal registration of the company and its work in this jurisdiction opens Asian markets for business, the possibility of scaling up, attracting investments from the global crypto community, and establishing cooperation with representatives of different industries.

Tax environment.
No VAT/GST, capital gains tax, or currency controls, all of which contribute to the active development of the virtual asset sphere.

Stable economy.
Hong Kong is in the top three in the rating of “ease of doing business”, many startups, fintech industry incubators, banks, and financial institutions are registered. Several global crypto exchanges operate in the jurisdiction: Binance, Coinbase, Nexo, and Bitfinex

As of June 1, 2023, the SFC began issuing licenses for crypto trading platforms, now virtual asset service providers (VASPs) are subject to regulatory review.

Taking the side of investor protection, the SFC imposes several requirements for authorization, including:

• Registration with the SFC is mandatory. Illegal activities within Hong Kong are punishable by a fine. For activities related to the distribution, sale/purchase of virtual assets, obtaining a cryptocurrency license in Hong Kong is required.
• Compliance with AML/KYC procedures. The regulator requires the identification of clients and monitoring of transactions for the possibility of money laundering.
• Technical support for data storage. The company is required to secure customer assets from cyber-attacks. Also, transaction and customer data must be retained for a certain period to allow for auditing at any time.
• Company structure and financial accounting. The company provides a financial statement and balance sheet regularly, as well as full disclosure of the managers and beneficiaries.
• Proof of financial solvency. The business must provide convincing evidence to the Regulator that it has sufficient resources to conduct crypto activities.

Most often crypto entrepreneurs choose to register – a company limited by shares (Private Company Limited by Shares).

Requirements from the legislation for registration in the state registry:

• Provide copies of passports of all directors, and founders with translation into English and be notarized. Also indicate phone numbers, and e-mail and confirm the address of residence.
• If one of the founders is a legal entity, all documents for the company, including identification documents for the directors and beneficiaries, must be submitted in addition.
• Requirements for the authorized capital are not specified in the legislation but usually indicate – USD 129.
• It is obligatory to keep accounting records, documents are kept for at least 7 years, and annual declaration is submitted to the Tax Inspectorate.
• Number of shareholders: minimum one – maximum 50.
• Shareholders’ meetings are obligatory, but the place does not matter.
• Norms for the number of directors: two, can be physical persons can be legal entities, and there are no requirements for residency.
• It is mandatory to have a secretary (physical person or legal entity) – a resident of Hong Kong.
• There must be a registered office where all documents (minutes of meetings, registers of shareholders, financial statements) will be kept.
• AML/KYC policy is a prerequisite for crypto companies.
• The future crypto service provider must prove its financial solvency before the Regulator.

This global financial giant provides an excellent opportunity to: enter the international market; access a developed banking system; and attract investors to companies with a proven track record from the Hong Kong Regulator.

The permit application process begins with the collection of these documents:

• Constituent documents (protocols, articles of association, Memorandum of Association, agreements registration certificate)
• Data on the main managers and beneficiaries (passports, criminal record certificates, proof of work experience, as well as their phone numbers and e-mail addresses)
• Information on hired employees (secretary, AML manager)
• AML/KYC policies and procedures
• Confirmation of information on availability of premises (lease, purchase/sale agreement) and application to SFC for its establishment for storage of documents.
• Letter of authorization from board of directors to apply.

With the development of the cryptosphere, the governments of many countries have been faced with the issue of controlling the fintech industry. In Hong Kong, a license is issued by the Chief Regulator SFC for certain types of business related to virtual currencies. The successful conduct of licensed activities in this jurisdiction means strict compliance with all legal regulations, AML procedures, and audits of the financial activities of companies.

The main types of licenses in Hong Kong:

• Type 1 license – must be issued if the activity will be related to securities trading, Security Token.
• License type 9 – is issued for asset management, investment portfolios, and investments in virtual assets.
• Type 4 license – required for consulting

Companies are required to apply for a permit if their type of business is related to:

1. Fund management

Companies offering fund management services that invest in virtual currencies are required to obtain a type 9 forex broker license.

2. Trading platforms

Cryptocurrency trading platforms that provide an opportunity to buy/sell cryptocurrency products – Security Tokens, which are equated to securities, or on the platform there is an exchange between digital currencies and fiat currencies that receives a license type 1.

3. Distribution of funds

Organizations that offer the sale to investors of investment products related to cryptocurrencies execute a Type 9 license.

4. Advisory services

Companies providing advisory services, and developing strategies for investing in cryptocurrencies must obtain a Type 4 (advisory services) or Type 9 (asset management) license.

The Securities and Futures Commission of Hong Kong (SFC) acts as the main Regulator in Hong Kong. It is the SFC that oversees the compliance of crypto market players. Hong Kong has earned the reputation of a global financial hub, and to maintain its status, the entire legal framework is adapted to the recommendations of the FATF and the norms of other international financial organizations.

Cryptocurrencies are regulated here under the Securities and Futures Ordinance (SFO) and the Anti-Money Laundering and Countering the Financing of Terrorism Ordinance (AMLO).

The SFC stands up for consumer protection and requires financial service providers to strictly comply with AML and KYC procedures based on the Prevention of Money Laundering and Financial Terrorism Act.

Regarding ICOs, the SFC has published its guidelines stating that if the tokens are considered securities, then the activity is licensed. In 2019, the Securities and Futures Commission (SFC) issued guidance on the offering of securities tokens (STOs).
In 2018, the government approved blockchain technology, and in 2023, the Hong Kong Monetary Authority (HKMA) launched e-HKD to explore digital currencies.

The Hong Kong government is working hard to study digital currencies and develop a legislative system that meets all international requirements.

A license from the SFC is the right to legally conduct business in digital currencies in the territory of the key financial center.

The Hong Kong government has invested heavily in researching blockchain technology, and virtual currencies and adapting the regulatory framework to meet the challenges of today’s financial markets.

Algorithm for obtaining a license from the SFC:

• Consultation with the Regulator about the type of license to be obtained for the company
• Collection of documents, registration of the application with the Regulator, preparation of AML/KYC procedures
• Analysis and verification of SFC documents, additional information, and data may need to be submitted
• Obtaining a license from the SFC entitles you to operate legally in that jurisdiction.

Advantages of obtaining an SFC license:

• Regulated Environment. The SFC has developed clear AML/KYC regulatory rules for digital currency-related activities.
• Reputation in the global market. SFC protects the rights of clients and requires compliance with all international regulations, so official authorization from the Regulator is a confirmation of business transparency.
• Entry into global markets. Developed infrastructure, advanced IT technologies, presence of global financial giants make this jurisdiction very attractive for doing business.
• Scaling of business. Legalization of activities attracts the attention of investors because the company has already been checked by the Regulator and it means safety for investing money.

A license from the SFC indicates that the business meets all standards, and plans to conduct legal business in the international arena.

If a company registers in Hong Kong but does not have a bank account in this jurisdiction, and does not conduct business with counterparties of this country, then it is exempt from taxes and from obtaining a license.

Tax rates:

• Profit tax up to $250 thousand -8.25%, over -16.5% (profit received in Hong Kong is taxed)
• VAT 0%
• Property tax 15% (purchase/sale)
• Dividends are not taxed

Taxation of cryptocurrency transactions:

• Profits earned from trading virtual currencies are subject to income tax
• Mining will be taxed if it equates to profits from operations
• ICO is treated as income to the company and taxed