Hong Kong sets measures to regulate virtual assets

The Securities and Futures Commission has issued a statement setting out its new regulatory approach for virtual assets and a circular providing guidance to intermediaries that distribute virtual asset funds

What has happened?

The Hong Kong Securities and Futures Commission (SFC) has set a new approach to bring virtual asset portfolio managers, fund distributors and trading platform operators under its "regulatory net".

What does this mean?

The SFC has issued a statement, setting out a new measures to protect investors, in light of the "significant risks" posed by virtual assets, including cryptocurrencies, cryptoassets and digital tokens.

The statement also sets out a conceptual framework for potentially regulating cryptocurrency exchanges.

The SFC said that it will impose licensing conditions on firms that invest at least 10% of their gross portfolios into virtual assets, irrespective of whether the virtual assets are "securities" or "futures contracts".

The regulator added that, at present, virtual assets do not meet the definition of "securities" or "futures contracts" under the Securities and Futures Ordinance.

"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," the SFC said.

The regulator has also issued a circular, which provides guidance and reminds virtual assets funds that they should be registered with or regulated by the SFC and meet its regulatory requirements, including suitability obligations, under which intermediaries should ensure that recommendation or solicitation made is suitable for clients.

"The measures announced today allow us 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," said Ashley Alder, the SFC’s Chief Executive Officer, in a press release.

"We have 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 us," he added.

Under this framework, the SFC will explore whether cryptocurrency exchanges can be regulated under the SFC Regulatory Sandbox.

The SFC said it will observe the operations of cryptocurrency exchanges and their compliance with proposed regulatory requirements in sandbox.

"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 said.

Next steps

If you want to take advantage of blockchain's huge potential and disruptive impact, while avoiding falling foul of ever-developing regulatory and legal requirements, visit our Hogan Lovells Engage Blockchain Toolkit.

Mark Parsons
Hong Kong


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