Hong Kong’s Securities and Futures Commission (SFC) says it will bring crypto funds under its securities regulations to improve investor protection.

In a circular issued Thursday, the financial regulator said that investment funds based in Hong Kong and that intend to invest more than 10 percent of their gross portfolios into “virtual assets,” either directly or indirectly via intermediaries, will have to be licensed and registered with the agency.

In a footnote, the SFC further explained that “virtual assets” are defined as “digital tokens (such as digital currencies, utility tokens or security or asset-backed tokens) and any other virtual commodities, crypto assets and other assets of essentially the same nature.”

This rule applies irrespective of whether the underlying crypto assets amount to securities or futures contracts as defined in the Securities and Futures Ordinance (SFO), according to the statement.

Ashley Alder, the SFC’s chief executive officer, said in a news release:

“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”

Jehan Chu, managing director of the Hong Kong-based crypto investment firm Kenetic Capital, said the move comes after the SFC had reached out to the industry, seeking feedback and insights.

“We are happy to see the SFC taking concrete steps to provide clarity and guidance around digital asset management, distribution of fund interests and trading platforms, which shows that the SFC is willing to support the growth of the crypto and blockchain eco-system in a safe and sustainable manner,” he said.

The regulator also indicated it is planning to allow cryptocurrency exchanges in the city to opt-in to a new sandbox program in a bid to determine whether to impose a licensing scheme for trading platforms in the future – an approach taken by SFC’s counterpart in Japan.

Under the sandbox, the SFC said it will observe the operations of cryptocurrency exchanges and place interested and qualified parties in the regulatory sandbox after careful consideration.

“Factors to be considered include the adequacy and effectiveness of the proposed conceptual framework; ability to comply with the terms and conditions; investors’ interests; as well as local market and international regulatory developments,” the statement reads.

Currently, none of the crypto exchanges in Hong Kong are licensed, as per the conceptual framework paper published today. If granted, they will be subject to intensive reporting and monitoring to ensure that strict internal controls are operating as expected and investor interests are protected.

Alder added, “We hope to encourage the responsible use of new technologies and also provide investors with more choices and better outcomes.”

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