Hong Kong releases regulations for ‘Crypto Fund Managers’

The Hong Kong Securities and Futures Commission (SFC) released new licensing terms and conditions for Virtual Asset Fund Managers to close the existing regulatory gap on virtual asset management portfolio activities.

Under the new framework, certain activities involving virtual assets that fall outside the definition of ‘securities’ or ‘futures contracts’ will now be brought within the SFC’s oversight through licensing conditions. They apply to licensed corporations managing a fund where the stated investment objective is to invest in virtual assets or to invest 10% or more of the gross asset value in virtual assets.

The licensing conditions are based on the principles contained in the existing requirements under the Code of Conduct for Persons Licensed by or Registered with the SFC and the Fund Manager Code of Conduct, but adapted to address the particular risks associated with virtual assets.

The terms and conditions cover matters such as restrictions on distribution of any virtual asset fund, custody of assets and disclosure requirements. Managers are required to have sufficient human and technical resources for the proper performance of duties as well as to adopt risk management and compliance policies, as well as policies for Anti-Money Laundering and Combating the Financing of Terrorism.

In order to ensure the safety of fund assets, the SFC also requires virtual asset managers to appoint a functionally independent custodian. A virtual asset fund manager must also evaluate the features of diverse custodial arrangements, including hardware and software infrastructure, security controls over key generation, storage, management and transaction as well as the process of handling blockchain forks.

Hong Kong has established itself as one of the most progressive jurisdictions for cryptocurrencies and blockchain. Earlier this year, the SFC issued guidance on security token offerings, intending to bring more clarity on legal and regulatory requirements.

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