Hong Kong issues guidance for intermediaries on virtual asset-related activities

The Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) issued, on 28 January, a Joint Circular updating the guidance for intermediaries engaging in virtual asset-related activities. It replaces the 2018 circular to intermediaries on the distribution of virtual asset funds.

Virtual assets (VAs) refer to digital representations of value that may be in the form of digital tokens – such as utility tokens, stablecoins or security- or asset-backed tokens – or any other virtual commodities, crypto assets or other assets of a similar nature.

VA-related products refer to products that have a principal investment objective or strategy to invest in virtual assets, derive their value principally from the value and characteristics of virtual assets, or track or replicate the investment results or returns that closely match or correspond to virtual assets.

Given the uneven global VA regulatory landscape, the SFC and the HKMA consider that investor protection measures, in addition to the requirements under the complex product regime, should be imposed to cover specific risks associated with the distribution of VA products.

The Joint Circular covers the following activities relating to VA-related products and services – the distribution of VA-related products, the provision of VA dealing services and the provision of VA advisory services.

The following requirements are applicable to the distribution of VA-related products:

  • VA-related products are likely to be considered complex products and therefore the general requirements relating to the distribution of complex products will apply.
  • Except for a limited suite of products, VA-related products that are considered complex products should only be offered to professional investors.
  • Except for institutional professional investors and qualified corporate professional investors, intermediaries should assess whether clients have knowledge of investing in virtual assets or VA-related products prior to effecting a transaction in VA-related products on their behalf and ensure that clients have sufficient net worth to be able to assume the risks and bear the potential losses of trading VA-related products.
  • Intermediaries are required to observe any other selling restrictions in Hong Kong and other jurisdictions that may be applicable to a particular VA-related product and suitability obligations.
  • Intermediaries should be cautious and ensure that a client has the financial capacity to meet obligations arising from leveraged or margin trading in VA-related products.
  • Intermediaries should ensure that information relating to VA-related products and underlying VA investments are provided in a clear and easily comprehensible manner.
  • Intermediaries should provide warning statements to clients specific to VAs that include, but are not limited to, the general risks of trading in futures contracts, risks specific to VA futures contracts, global regulatory developments, price volatility, and other applicable risks.

The following requirements are applicable to the provision of VA dealing services:

  • VA dealing services should only be provided to ‘professional investors’.
  • Intermediaries should comply with all SFC and HKMA regulatory requirements when providing VA dealing services, regardless of whether the VAs involved are securities.
  • Intermediaries must partner only with SFC-licensed VA trading platforms.
  • VA dealing services should only be provided to intermediaries’ existing clients for Type 1 regulated services (dealing in securities).
  • The SFC will impose licensing / registration terms and conditions (T&Cs) setting out conduct requirements for intermediaries’ provision of VA dealing services under an omnibus account arrangement. These T&Cs will impose various obligations on intermediaries, including only permitting clients to deposit or withdraw fiat currencies from their accounts, and not to allowing the deposit or withdrawal of client VAs to minimise risks associated with such transfer.
  • Licensed corporations intending to invest 10% or more of the gross asset value of a portfolio in VAs will be subject to additional requirements as set in the 2019 ‘Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets’.
  • Intermediaries with a Type 1 licence that are authorised by their clients to provide VA dealing services on a discretionary basis as an ancillary service should only invest less than 10% of the gross asset value of the client’s portfolio in VAs.

The following requirements are applicable to the provision of VA advisory services:

  • All the regulatory requirements imposed by the SFC and HKMA when providing advisory services, irrespective of the nature of the VAs.
  • VA advisory services should only be provided to intermediaries’ existing clients for which they provide Type 1 (dealing in securities) or Type 4 (advising on securities) regulated services.
  • Intermediaries should only offer VA advisory services to ‘professional investors’ and conduct a VA knowledge test before providing the services.
  • Intermediaries providing advisory services in VA-related products should observe the same requirements as those for the distribution of VA-related products and must, at the same time, ensure the suitability of recommendations.

There will be a six-month transition period for intermediaries providing VA-related activities to existing clients to fully implement the requirements in the Joint Circular. Intermediaries that do not currently engage in VA-related activities should ensure that they are able to comply before introducing such services.


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