Hong Kong Regulator Brings New Rules To Regulate Cryptocurrency Exchanges and Funds

The securities watchdog says that the new regulations bring all virtual assets-related activities and fund managers under its regulatory purview.

Photo: akwan.architect / Flickr

Photo: akwan.architect / Flickr

Hong Kong’s security watchdog – The Securities and Futures Commission (SFC) – has announced new regulatory rules and guidelines for the country’s local cryptocurrency market. However, the highlight of this announcement is that the regulator wants to have a watchful eye on the operations of cryptocurrency exchange and cryptocurrency funds.

In its official announcement, the SFC notes under the existing rules, virtual assets do not fall under the definition of “securities” or “futures contracts”. Hence they do not come directly under the regulatory oversight of the SFC. As a result, investors who are dealing with virtual assets through unregulated platforms do not get the protection under the Securities and Futures Ordinance (SFO). Thus the SFC has decided that to protect the investors’ interest, it will bring crypto exchange operators under its regulatory purview.

“…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,” the SFC adds.

The definition of “virtual assets” provided by the SFC includes all blockchain-based tokens like the utility tokens, digital currencies, and the asset-backed tokens.

Licenses for Cryptocurrency Fund Distributors and Portfolio Managers

Under the new regulatory guidelines, cryptocurrency fund distributors and portfolio managers will require to get an official license from the SFC. Fund managers with more than 10 percent exposure into virtual assets will have to mandatorily get their licenses. Also, “firms managing funds which solely invest in virtual assets that do not constitute securities or future contracts” will require a license for the distribution of their funds. The statement 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.’”

Ashley Alder, the chief executive of the SFC praised the agency for its new approach towards investors protection.

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

The Growing Regulatory Demand Due to Increasing Risks

The SFC cites several risks associated while dealing with virtual assets. The regulator says that the inherent nature and characteristics of the virtual assets are some of the reasons behind it. As crypto assets lack any intrinsic value, they are subject to high volatility and price fluctuations.

Furthermore, the anonymous nature of virtual assets makes them vulnerable to all sorts of illicit activities like terror financing, fraud, and money laundering.  Additionally, the cryptocurrency market is facing huge challenges in terms of cyber-security risks and thefts. Most of the centralized exchanges across the globe have faced huge losses this year due to external attacks. On top of it, the lack of secure storage solutions is another reason preventing investor participation.

The regulator thus mandates proper regulatory rules to have a cleaner and safer environment for investors. It notes:

“While virtual assets have not posed a material risk to financial stability2, 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.”

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