The legislative council of Hong Kong has amended its anti-money laundering (AML) and counter-terrorist financing (CFT) financing system to include virtual/crypto asset service providers.

The legislation will create a new licensing regime for crypto asset service providers, which will go into effect on 1 June 2023. The new amendment will subject crypto exchange service providers to the same legislation that traditional financial institutions are subject to.

The development implies that crypto exchanges seeking to open a business in Hong Kong will have to follow strict AML/CFT guidelines and investor protection laws before receiving a license to operate. Unlike most other regulators around the world, Hong Kong used the FTX collapse to reduce regulatory risks associated with centralized exchanges.

There is an increasing call to bring cryptocurrency exchanges and service providers under the jurisdiction of the law and subject them to stringent AML and investor protection requirements. Regulators from around the world have come under fire for failing to protect retail investors in the aftermath of FTX’s demise.

Can Hong Kong become the next crypto center?

Eddie Yue, Hong Kong Monetary Authority CEO recently hinted at possible investor protection regulations coming soon to the region. The recent amendment has propelled the nation to become the first mover on the pressing issue of investor protection.

Hong Kong has been actively working to lay a solid regulatory foundation for the nascent crypto market. The regulator is also considering allowing retail investors to invest in crypto-related exchange-traded funds (ETFs).

In October, the Hong Kong government published a policy proposing a regulatory framework and risk-based regulatory direction under the “Policy Declaration on the Development of Virtual Assets.”

The government has proposed a number of pilot projects to evaluate and improve the underlying technologies of virtual assets. The city government also intends to embrace emerging technologies such as NFTs and metaverse, with the goal of transforming Hong Kong into an international virtual asset center.