Hong Kong’s Securities and Futures Commission (SFC) has stepped up its regulation for cryptocurrency fund distributors and portfolio managers.
In a circular, the regulator said the distribution of funds investing in virtual assets will trigger the Type 1 licensing requirement for dealing in securities. This is regardless of whether or not the underlying cryptocurrencies constitute ‘securities’ or ‘futures contracts’ as defined by the Securities and Futures Ordinance.
The new rules are expected to apply to all independent asset managers, multi-family offices and private banks investing in cryptocurrencies. Currently, none of the international private banks in the jurisdiction have announced that they are offering these investments.
The SFC has also asked distributors to comply with the jurisdiction’s code of conduct for licensed and registered persons and institutions and adhere to suitability obligations, installing additional requirements for unauthorised cryptocurrency funds.
Intermediaries can only sell unauthorised funds to professional investors and will need to assess if clients have knowledge of investing in digital assets or related products before conducting transactions, unless they are institutional investors.
Alternatively, the regulator has allowed intermediaries to take into account the private equity and venture capital investing experience of clients in the past two years.
The regulator has also asked distributors to conduct proper due diligence on unauthorised funds, fund managers and parties providing trading and custodian services to the funds.
This includes the liquidity risk management policy, list of instruments, concentration limits, the use of leverage and derivatives and cybersecurity measures taken by the fund.
In addition, intermediaries will have to provide easily comprehensible information on the funds, underlying investments and warning statements to clients. This includs statements on price volatility, potential price manipulation by exchanges and platforms as well as the lack of secondary markets for certain assets.
The regulations are part of sweeping changes to the regulatory framework for cryptocurrencies in Hong Kong, which will now require all cryptocurrency fund managers to hold a Type 9 licence meant for conducting asset management.
Licence applicants and licensed corporations will have to also inform the SFC if they are managing or plan to manage one or more portfolios that invest in digital assets.
Until now, like Singapore, Hong Kong has been regulating cryptocurrencies that fall under the definition of securities or futures contracts.
The SFC made the announcement last week during the Hong Kong Fintech Week, which is also when the FinTech Association of Hong Kong announced revised best practices for token sales in a 35-page report.
Initial coin offerings remain a popular medium used by cryptocurrency companies to raise funds. Over $7 billion has been raised globally so far in 2018, according to icodata.io.