In November 2018, “statement on regulatory framework for virtual asset portfolios managers, fund distributors and trading platform operators” was released by Securities and Futures Commission of Hong Kong(the SFC). See here. Key points include:

1. Regulatory approach for virtual asset portfolio managers and fund distributors

1.1 Virtual asset portfolio managers

The SFC considers that all licensed portfolio managers intending to invest in virtual assets should observe essentially the same regulatory requirements even if the portfolios (or portions of portfolios) under their management invest solely or partially in virtual assets. the SFC has developed a set of standard terms and conditions (Terms and Conditions) which captures the essence of the Existing Requirements——“Regulatory standards for licensed corporations managing virtual asset portfolios”

Scope of Supervision

Management of portfolios (or portions of portfolios)that invest in virtual assets (virtual asset portfolios) may or may not be subject to the SFC’s regulatory oversight, depending on whether these assets amount to “securities” or “futures contracts” as defined under the Securities and Futures Ordinance (SFO). In particular:

(a) where a firm only manages a portfolio which invests solely in virtual assets which do not amount to “securities” or “futures contracts” (hereafter referred to as “non-SF virtual assets”), for example, Bitcoin and Ethereum, it is not required to be licensed or registered for Type 9 regulated activity (asset management), ie, to be a Type 9 intermediary. Notwithstanding the above, the firm will be required to be licensed or registered for Type 1 regulated activity (dealing in securities) if it distributes a fund under its management that solely invests in non-SF virtual assets in Hong Kong;

(b) where a firm manages a fund of funds, regardless of whether each underlying fund invests solely or partially in non-SF virtual assets, the firm is required to be a Type 9 intermediary; and

(c) where a Type 9 intermediary, besides managing a portfolio of securities, futures contracts or both (which would amount to a regulated activity), also manages another portfolio that solely or partially invests in non-SF virtual assets, the current legal and regulatory requirements do not apply to the intermediary insofar as its management of the portfolio or portion of portfolio relates to non-SF virtual assets.

Licensing conditions

The terms and conditions will be imposed on licensed corporations which manage or plan to manage portfolios with (i) a stated investment objective to invest in virtual assets; or (ii) an intention to invest 10% or more of the gross asset value (GAV) of the portfolio in virtual assets (10% GAV de minimis threshold).

Licensed corporations should only allow professional investors as defined under the SFO to invest into the above 2 kinds of portfolios. And licensed corporations should also clearly disclose all the associated risks to potential investors and distributors.

1.2 Virtual asset fund distributors

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). Further guidance on the expected standards and practices when distributing virtual asset funds is provided in the “Circular to intermediaries on the distribution of virtual asset funds”

2. Exploring regulation of platform operators

To conduct a meaningful study of the framework, the SFC will work with interested virtual asset trading platform operators that have demonstrated a commitment to adhering to the high expected standards by placing them in the SFC Regulatory Sandbox.

In the initial exploratory stage, the SFC would not grant a licence to platform operators. Instead, it would discuss its expected regulatory standards with platform operators and observe the live operations of the virtual asset trading platforms in light of these standards. It may be a possibility that the SFC will conclude that risks involved cannot be properly dealt with under the standards it would expect, and that investor protection still cannot be ensured. In that case, the SFC may decide that platform operators should not be regulated by the SFC. If the SFC makes a positive determination at the end of this stage, it would then consider granting a licence to a qualified platform operator. After a minimum 12-month period, the virtual asset trading platform operator may apply to the SFC for removal12 or variation of some licensing conditions and exit the Sandbox.

Details are set out in “Conceptual framework for the potential regulation of virtual asset trading platform operators”

Sources

• Statement on initial coin offerings, Securities and Futures Commission
• Securities and Futures Ordinance of Hong Kong
• statement on regulatory framework for virtual asset portfolios managers, fund distributors and trading platform operators
• “Regulatory standards for licensed corporations managing virtual asset portfolios”