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Hong Kong SFC sets new regulatory approach for virtual assets

According to a recent press release, The Securities and Futures Commission (SFC) of Hong Kong issued a statement setting out a new approach which aims to bring virtual asset portfolio managers and distributors of virtual asset funds under its regulatory net.

A virtual asset is a digital representation of value. Examples include “cryptocurrencies”, “crypto-assets” and “digital tokens.

It also sets out a conceptual framework for the potential regulation of virtual asset trading platforms (commonly known as cryptocurrency exchanges).

In light of the significant risks virtual assets pose to investors, the SFC will adopt new measures within its regulatory remit to protect those who invest in virtual asset portfolios or funds.

The SFC will impose licensing conditions on firms which manage or intend to manage portfolios investing in virtual assets (where 10% or more of the gross asset value of the portfolio is invested in virtual assets), irrespective of whether the virtual assets meet the definition of “securities” or “futures contracts”.

At present, many virtual assets do not meet the definition of “securities” or “futures contracts” under the Securities and Futures Ordinance (SFO). As such, managing funds solely investing in virtual assets which do not constitute “securities” or “futures contracts” does not amount to a “regulated activity” as specified under the SFO.

In an accompanying circular, the SFC provided detailed guidance and reminded firms which distribute funds investing in virtual assets that they should be registered with or regulated by the SFC and comply with its regulatory requirements, including the suitability obligations (intermediaries should ensure that the recommendation or solicitation made is suitable for clients in all circumstances), when distributing these funds.

The SFC’s Chief Executive Officer stated that the measures announced to allow the government to regulate the management or distribution of virtual asset funds in one way or another so that investors’ interests would be protected either at the fund management level, at the distribution level, or both.

He also noted that the SFC hopes to encourage the responsible use of new technologies and also provide investors with more choices and better outcomes. The Commission has also set out a conceptual framework to explore a pathway for compliance for virtual asset trading platform operators who are willing to be supervised by the SFC, he added.

Under this framework, also announced in the statement, the SFC will explore whether virtual asset trading platforms are suitable for regulation in the SFC Regulatory Sandbox (please see the SFC’s earlier press release for more details).

The SFC will observe the operations of interested trading platform operators and their compliance with proposed regulatory requirements in the Sandbox environment.

The SFC proposes that the standards of conduct regulation for virtual asset trading platform operators should be comparable to those applicable to licensed providers of automated trading services.

If it is decided at the end of this stage that it is appropriate to regulate platform operators, the SFC would then consider granting a licence and putting them under its close supervision.

Alternatively, it may take the view that the risks involved cannot be sufficiently addressed and no licence shall be granted as protection for investors cannot be ensured.

The SFC is closely monitoring the development of virtual assets and may issue further guidance where appropriate.

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