On 20 October 2023, the Securities and Futures Commission ("SFC") and the Hong Kong Monetary Authority ("HKMA") issued a joint circular ("Circular")[1] to SFC regulated intermediaries ("SFC Intermediaries") on their regulatory expectations for virtual asset ("VA") related activities ("VA Activities"), in respect of (i) the distribution of VA-related products ("VA-related Products"), (ii) the provision of VA dealing services, (iii) the provision of VA advisory services and (iv) the management of portfolios investing into VAs. The Circular superseded the SFC's previous circular dated 28 January 2022[2] ("2022 Circular").
The Circular has implemented a number of changes to the regulatory requirements regarding VA Activities in light of the latest market developments, including that VA trading platforms licensed pursuant to Securities and Futures Ordinance ("SFO") and/or Anti-Money Laundering and Counter-Terrorist Financing Ordinance ("AMLO") ("VATPs") are allowed to serve retail investors and VA futures exchange traded funds ("VA Futures ETFs") are authorized for public offering in Hong Kong. The relevant proforma terms and conditions applicable to SFC Intermediaries which have sought SFC's "approval" to deal in, advise on, or manage portfolios that invest in VAs ("T&Cs") have also been updated accordingly.
Key Changes and Takeaways
We have summarised below the key changes and takeaways under the Circular:
VA Activities |
Key Changes / Takeaways |
Distribution of VA related Products |
|
VA Dealing Services |
|
VA Advisory Services |
|
VA Fund Management Services (for fund managers managing portfolios which meets the De Minimis Threshold[4]) |
|
Intermediaries which are already providing VA dealing services to non-qualified corporate professional investors and individual professional investors and wish to continue providing such services to them should align their systems and controls with the updated requirements. There will be a three-month transition period (which expires on 19 Janaury 2024) for intermediaries which are providing VA dealing services before the full implementation of the expected requirements in the Circular.
Intermediaries which do not currently engage in VA-related activities or which plan to extend their VA dealing services to non-qualified corporate professional investors, individual professional investors, or retail investors should ensure that they are able to comply with the requirements in the Circular before introducing such services.
SFC Intermediaries are also reminded to notify the SFC (and the HKMA, where applicable) in advance if they intend to make any changes to the activities they conduct (including changes in the type of clientele served).
Conclusion
The SFC and HKMA have made some considerable changes to the regulatory requirements relating to VA Activites in the Circular, many of which can be considered as crypto-friendly and are generally welcomed by the industry. Despite the recent controversies and incidents relating to VAs, the Circular appears to signify an unwavering determination of policy makers and regulators in Hong Kong for Hong Kong to become Asia's virtual asset hub. Some of the changes in the Circular also appear to be hinting at allowing access by retail investors to SFC-authorised VA-spot mutual funds and ETFs (before the US SEC is able to approve its first), as well as introducing regulatory guidance on tokenization and securities token offering (STOs) - we shall closely monitor any new VA-related regulatory policies which may be announced during the Hong Kong Fintech Week in the first week of November.
Howse Williams' Virtual Assets Practice
Howse Williams' Virtual Asset team is at the cutting edge of virtual assets legal work and has been actively advising clients within the virtual assets ecosystem in relation to virtual asset and tokenized funds, and the complex and rapidly evolving regulatory framework in relation to virtual assets. We regularly advise on both transactional and contentious and non-contentious regulatory matters, therefore making us unique in the market.
Amongst others, our lawyers have advised various virtual asset fund managers (including one of the first) in securing regulatory approval from the SFC to manage 100% virtual asset funds, which led to nominations at leading industry awards. Our lawyers have acted as legal counsel for a Hong Kong asset manager to receive the first “no further comment” letter from the SFC to launch a tokenised fund investing in certain Hong Kong real estate development project, as well as advising on multiple regulatory investigations concerning virtual asset trading platforms and the first liquidation of a crypto exchange in Hong Kong.
[1] https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/intermediaries/supervision/doc?refNo=23EC44
[2] https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=22EC9
[3] "Institutional professional investors" is defined under paragraph 15.2 of the SFC's "ode of Conduct for Persons Licensed by or. Registered with the Securities and Futures Commission" ("SFC Code of Conduct") as persons falling under paragraphs (a) to (i) of the definition of "professional investor" in section 1 of Part 1 of Schedule 1 to the SFO. "Qualified corporate professional investors" refers to corporate professional investors which have passed the assessment requirements under paragraph 15.3A and gone through the procedures under paragraph 15.3B of the SFC Code of Conduct.
[4] "De Minimis Threshold" means where funds (or portions of funds) that invest in VAs have (a) a stated investment objective to invest in VAs; or (b) an intention to invest 10% or more of the gross asset value of their portfolio in VAs.
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Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice. Please contact [email protected] if you have any questions about the article.