A Deep Dive into Hong Kong’s New AML Guidelines for VASPs: Part I

Today, Hong Kong’s Securities and Futures Commission (SFC) concluded its consultation on the regulation of virtual asset trading platforms and has gazetted the "Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations and SFC-licensed Virtual Asset Service Providers)" which sets forth Travel Rule obligations. The SFC received 152 written submissions from the industry, including one from the Notabene, submitted by our Regulatory and Compliance team.

In a series of two blog posts, we will cover key Travel Rule compliance takeaways. Part I covers the entry into force, information transmission obligations, pre-transaction requirements, and self-hosted wallet obligations. Part II will cover obligations for Intermediaries, Travel Rule solution requirements, how to handle deposits, and more.

Key Travel Rule Takeaways

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1. Hong Kong VASPs are required to comply with Travel Rule obligations from June 1, 2023

On June 1, 2023, significant progress is expected to be achieved in the adoption of the Travel Rule in the APAC region. Both Hong Kong and Japan will require Virtual Asset Service Providers (VASPs) to begin complying with Travel Rule requirements. This milestone holds great importance as more than 80 crypto firms from mainland China and other countries have expressed interest in establishing a presence in Hong Kong, bolstering the city's ambition to become a leading hub for Web3 technologies.

In addition, European VASPs are gearing up for a busy summer, with the implementation of the Travel Rule in Portugal on July 15 and in the United Kingdom on September 1. These developments indicate a growing global trend toward enhancing regulatory oversight and anti-money laundering measures within the cryptocurrency industry. 

Get in touch with Notabene and start a fast and straightforward rollout of the Travel Rule through our SAFE Implementation Phases. 

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2. VASPs are required to transmit information for all transactions, with a limited scope of information required for transactions below HKD 8,000

Hong Kong reinforces the APAC trend of requiring Travel Rule information transmission regardless of transaction amount while allowing a more limited scope of information to be transmitted for transactions below HKD 8,000. 

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Originator VASPs are required to obtain, record and transmit to the Beneficiary VASP the required originator and beneficiary information, as follows: ^[1]

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Travel Rule information transmission obligations in Hong Kong 🇭🇰

Notabene helps VASPs comply with Travel Rule requirements globally by embedding information transmission requirements in our transaction validation system. By integrating with Notabene, Hong Kong VASPs can easily validate transactions against Notabene’s embedded jurisdictional rules and ensure that all the required information - considering the transaction amount - is included in the Travel Rule message.  

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3. Travel Rule obligations must be fulfilled pre-transaction

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The originator VASP must submit the required Travel Rule information to the Beneficiary VASP before or when the virtual asset transfer is conducted. [2]

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According to Notabene’s 2023 State of Travel Rule Report, 37.5% of companies reporting to be Travel Rule-compliant fulfill requirements post-transaction, which does not align with the FATF’s pre-transaction requirements nor with the requirements in Hong Kong. In fact, 11.6% of respondents to our survey fulfill Travel Rule obligations only after the settlement of the corresponding blockchain transactions, up from 7% in the previous report, representing a 51% increase since last year. While this demonstrates progress, it highlights the need for jurisdictions to clarify that the Travel Rule is a pre-transaction obligation. 

Notabene welcomes the clarification by the SFC that Travel Rule compliance needs to be performed pre-transaction. This is particularly important given the specific characteristics of virtual asset transactions: settlement is immediate and irreversible; hence, only pre-transaction actions can effectively mitigate risk.

Through our partnership with Fireblocks, Notabene offers the first fully integrated solution between custody and the Travel Rule, allowing VASPs to smoothly tie Travel Rule compliance and transaction settlement. 

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4. Account ownership verification is required when transacting with self-hosted wallets and higher-risk VASPs

Hong Kong joins Singapore 🇸🇬, Switzerland 🇨🇭, Germany 🇩🇪 and the European Transfer of Funds regulation in requiring VASPs to verify the customers’ wallet ownership when transacting with self-hosted wallets. Notabene helps VASPs comply with these requirements by providing a self-hosted wallet identification tool, allowing customers verify the ownership of the self-hosted wallet before transacting.

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The novelty of Hong Kong’s approach is requiring that same verification when transacting with VASPs that present higher ML/TF risks. In these cases, the VASP must verify that the customer owns or controls the account maintained with the higher-risk VASPs by obtaining, for instance, a statement of account. ^[3]

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The move by Hong Kong’s SFC to tighten regulations on VASPs demonstrates a rising trend toward greater clarity in global Travel Rule guidelines. As part of these regulatory changes, Hong Kong VASPs must comply with Travel Rule requirements from June 1, 2023, affecting VASPs across the region. Given the growing interest from numerous crypto firms to establish their presence in Hong Kong, this has significant implications.

Notabene’s role in this landscape is paramount, offering the industry’s only pre-transaction decision-making solution that ensures seamless compliance with these regulatory measures. Our service, which includes an integrated solution between custody and the Travel Rule and a self-hosted wallet identification tool, has the potential to significantly streamline the process of regulatory compliance for all VASPs, particularly in Hong Kong.

Click here to read part two.