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Hong Kong Reveals New Crypto and Crypto Fund Regulatory Guidelines

In recognizing the growing risks to retail investors and portfolio managers from un-regulated and potentially highly over leveraged crypto products, Hong Kong’s financial regulatory body Securities and Futures Commission (SFC) has outlined regulatory guidelines to curb and control risks. Key points from SFC’s new statement are as following (not an exhaustive list):

  1. Virtual assets (“cryptocurrency”, “crypto-asset” and “digital token”) fall under the definition of “securities” or “futures contracts” and related products and related activities may fall within the SFC‘s umbrella of regulation.
  2. Under existing regulatory laws in Hong Kong, virtual assets may not be subject to the oversight of the SFC, thus investors who trade in virtual assets through unregulated trading platforms or invest in virtual asset portfolios which are managed by unregulated portfolio managers do not enjoy the protections offered under the Securities and Futures Ordinance (SFO).
  3. The following types of virtual asset portfolio managers will be subject to the SFC‘s supervision:
    1. Firms managing funds which solely invest in virtual assets that do not constitute “securities” or “futures contracts” and distribute the same in Hong Kong
    2. Firms which are licensed or are to be licensed for Type 9 regulated activity (asset management) for managing portfolios in “securities”, “futures contracts” or both
  4. As per proposed new laws, only professional investors as defined under the SFO should be allowed to invest in any virtual asset portfolios.
  5. License applicants and licensed corporations are required to inform the SFC if they are presently managing or planning to manage one or more portfolios that invest in virtual assets.
  6. Firms which distribute funds that invest (solely or partially) in virtual assets in Hong Kong will require a licence or registration for Type 1 regulated activity (dealing in securities).
  7. As some of the world’s largest virtual asset trading platforms have been seen operating in Hong Kong but they fall outside the regulatory powers of the SFC, SFC is considering it necessary to explore how it can regulate virtual asset trading platforms under its existing powers.
  8. The SFC will keep the development of activities related to virtual assets in view and may issue further guidance where appropriate.

From the SFC statement:

“While virtual assets have not posed a material risk to financial stability, there is a broad consensus among securities regulators that they pose significant investor protection risks. The regulatory response to these risks varies in different jurisdictions, depending on the regulatory remit, the scale of the activities and their impact on investor interests and whether virtual assets are deemed financial products suitable for regulation.”

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