Hong Kong sets out new regulatory approach for virtual assets

Hong Kong’s Securities and Futures Commission (SFC) 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. It also sets out a conceptual framework for the potential regulation of virtual asset trading platforms.

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, irrespective of whether the virtual assets meet the definition of "securities" or "futures contracts”.

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, when distributing these funds.

"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. "We hope to encourage the responsible use of new technologies and also provide investors with more choices and better outcomes."

"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," Alder added.

Under this framework, also announced in today’s statement, the SFC will explore whether virtual asset trading platforms are suitable for regulation in the SFC Regulatory Sandbox The SFC will observe the operations of interested trading platform operators and their compliance with proposed regulatory requirements in the Sandbox environment.

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.