Hong Kong regulator looks to take digital assets under its wing

Securities and Futures Commission sets out regulatory approach for virtual asset portfolio managers and distributors of virtual asset funds.

Hong Kong’s Securities and Futures Commission (SFC) has set out an approach to bring virtual asset portfolio managers and distributors of virtual asset funds into its regulatory orbit.

Under existing regulatory remits in Hong Kong, markets for virtual assets may not be subject to the oversight of the SFC if the virtual assets involved fall outside the legal definition of securities or futures contracts. As a result, investors who trade in virtual assets through unregulated trading platforms or invest in virtual asset portfolios managed by unregulated portfolio managers do not enjoy the protections afforded under the Securities and Futures Ordinance (SFO), such as safe custody of assets and fair and open markets.

“The measures announced 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,” says Ashley Alder, the SFC’s chief executive officer.

The SFC considers that all licensed portfolio managers intending to invest in virtual assets should observe essentially the same regulatory requirements:

  • Only professional investors as defined under the SFO should be allowed to invest in any virtual asset portfolios (subject to a de minimis requirement);
  • Licence 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;
  • Firms distributing 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).

Separately, the SFC is also setting out a conceptual framework for the potential regulation of virtual asset trading platforms. The SFC considers that the regulatory approach under the conceptual framework – if implemented – could provide a path for compliance for those platform operators capable and willing to adhere to a high level of standards and practices and set licensed operators apart from those that do not seek a licence.

Under this framework, the SFC will explore whether virtual asset trading platforms are suitable for regulation via the SFC Regulatory Sandbox. It will observe the operations of interested trading platform operators and their compliance with proposed regulatory requirements in the Sandbox environment. If – following this – the SFC feels it is appropriate to regulate platform operators, it 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 will be granted.