Hong Kong Regulator Brings New Rules for Crypto Fund Distributors and Portfolio Managers

On Thursday, November 1, the Hong Kong Securities and Futures Commission (SFC) issued new rules and guidelines to established a regulatory framework for the working of cryptocurrency exchange operators, fund distributors and portfolio managers.

The Hong Kong regulator has held quite a different stand from China as crypto trading activities and transfers are still considered legal. However, the regulators noted that there has been a growing number of unlicensed crypto operators in Hong Kong. Thus in order to preserve the safety of investors, it was imperative for them to take this stand.

In addition to the regulations, the SFC is also working simultaneously on the conceptual framework that would streamline the functioning of exchange operators in the country.

In the official announcement , a statement from SFC reads: “While virtual assets have not posed a material risk to financial stability, there is a broad consensus among securities regulators that they pose significant investor protection risks. The regulatory response to these risks varies in different jurisdictions, depending on the regulatory remit, the scale of the activities and their impact on investor interests and whether virtual assets are deemed financial products suitable for regulation.”

In the announcement, the Hong Kong regulator also cites several risks associated with cryptocurrencies and their inherent nature of extreme volatility and price fluctuations. Moreover, other important issues are the ongoing cybersecurity threats and lack of availability of safe and secure custody solutions.

The decentralized functioning and the anonymity of digital assets make them a potential toll for other illicit activities of fraud, troop financing and money laundering. Under the new regulatory rules, the SFC puts all sorts of virtual assets under the category of “securities” and “futures contracts”.

Moreover, the regulator has noted that fund managers investing more than 10 percent of their holdings in digital assets will require a license from the regulator to engage in such dealings. The same is also applicable to “firms managing funds which solely invest in virtual assets that do not constitute securities or future contracts”.

The official statement from the SFC reads: “In order to afford better protection to investors, 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, irrespective of whether these virtual assets amount to ‘securities’ or ‘futures contracts.’

Regulatory bodies across the globe are working on introducing a proper framework to streamline the functioning of the currently unstructured cryptocurrency market. The SFC also notes that going further the functioning of crypto exchanges will directly fall under its supervision.

“...It is proposed that the standards of conduct regulation for virtual asset trading platform operators should be comparable to those applicable to existing licensed providers of automated trading services,” it adds.