Securities Regulator of Hong Kong Issues New Rules for Funds Having Exposure to Crypto Assets

Hong Kong’s regulatory authority - Securities and Futures Commission (SFC) - has issued new regulations for investors who are willing to invest in virtual digital assets.

In its last week’s announcement on October 4, the regulator unveiled the framework to regulate different investment funds who are willing to invest more than 10 percent of their portfolio in digital assets.

In the 37-page document, the regulator defines virtual assets as the “digital representations of value which may be in the form of digital tokens”. This entire cluster includes utility tokens, security tokens, digital currencies, and several other asset-backed tokens.

As per the regulator’s existing ordinance, they can also include crypto assets or virtual commodities that fall under the definition of “futures contracts” and “securities”.

Furthermore, the rules are general in a way such that it follows all existing regulations on fund-managers which are licensed by the Securities and Futures Commission (SFC).

For example, all the fund managers with investment products having exposure to cryptocurrencies should have a minimum capital of 3 million Hong Kong Dollars, which is similar to minimal requirement of all the SFC’s type 9 licensees.

Besides, the fund managers also need to appoint an independent compliance officer who can draft detailed compliance procedures.

The document states: “A Virtual Asset Fund Manager should also comply with all legal and regulatory requirements (including its licensing conditions) applicable to the conduct of its 7 business activities as well as its own internal policies and procedures so as to promote the best interests of its clients, funds and fund investors and the integrity of the market”.

Moreover, the rules also require crypto fund managers to appoint a third-party custodian while keeping the assets of the fund and the fund manager separately. Moreover, the fiat currency should also be kept separately in a licensed Hong Kong financial institution or any jurisdiction which is approved by the SFC.

Additionally, while choosing the custodian, the fund manager should ensure that they are capable to deal in virtual assets and can properly handle all its associated concepts like wallets and all. Fund managers should also conduct and extensive diligence of trading platforms before trading the crypto assets.