Interpretation | The latest version of the Hong Kong Securities Regulatory Commission's virtual asset regulatory provisions in 2019

On October 4, 2019, the Hong Kong Securities Regulatory Commission officially issued a proforma set of terms and conditions on the official website for the supervision of investment in virtual assets. This was followed by the Hong Kong Securities Regulatory Commission in November last year. After the publication of the "Statement on the Regulatory Framework for Management Companies, Fund Distributors and Trading Platform Operators of Virtual Asset Portfolios", a more specific regulatory provision for licensed virtual asset managers was officially released.

The HashKey Capital research team of the blockchain investment fund of HashKey Group, a Hong Kong digital asset management group, wrote an article after the release of the new regulation. It first analyzed the supervision of the Hong Kong Securities and Futures Commission (the Hong Kong Securities and Futures Commission) on virtual assets. The new rules are slightly different from the requirements of traditional fund management companies, the Fund Managers Code of Conduct.

The HashKey Capital research team stated:

– The framework of the "new rules" for virtual assets is basically the same as the "Factor Code of Conduct"; – The "new rules" on virtual assets are more like general operational guidelines and regulatory norms, helping virtual asset fund management companies to constrain behavior in practice. It also provides general operating instructions that can be viewed as a virtual asset version of the Code of Conduct .

In addition, the HashKey Capital research team specifically compares the “new rules” for virtual assets with the Fund Managers Code of Conduct and abstracts the main differences. The following is a report written by the HashKey Capital research team for readers to draw on.

 

First, the background:

On November 1, 2018, the Securities and Futures Commission (SFC) issued a statement on the regulatory framework for management companies, fund distributors and trading platform operators for virtual asset portfolios. Among other things, the SFC announces that it will manage or plan to manage (i) a portfolio that has stated that the investment objective is to invest in virtual assets; or (ii) intends to invest 10% or more of the total assets in the portfolio. Licensed corporations (collectively referred to as “virtual asset fund managers”) in the portfolio of virtual assets impose terms and conditions.

On October 4, 2019, the Hong Kong Securities and Futures Commission announced the Standard Terms and Conditions for Licensed Corporations that Manage Investment Portfolios in Virtual Assets, which will be applied to all Virtual Asset Fund Managers in the future.

"Standard Terms and Conditions for Licensed Corporations for Managing Investment Portfolios in Virtual Assets" (hereinafter referred to as "New Regulations") In our view, the general requirements for virtual asset fund managers, licensing requirements No new changes are consistent with the November 1, 2018 Statement on the Regulatory Framework for Management Companies, Fund Distributors and Trading Platform Operators for Virtual Asset Portfolios.

Second, the "new regulations" can be regarded as the virtual asset management version of the Fund Managers Code of Conduct.

The main contents of the “New Regulations” are divided into six parts and three appendices: six parts are: 1. General matters; 2. General principles; 3. Organization and structure; 4. Virtual asset fund management; 5. Funds and funds Investor transactions; 6. Report to the CSRC.

The three appendices are:

1. The regulations applicable to the virtual asset fund management company engaged in managing the entrusted account; 2. The monitoring technology and procedures for risk management; 3. The risk disclosure statement.

If we compare the SFC's requirements for traditional fund management companies – the Fund Manager's Code of Conduct, we find that the framework and ethical guidelines of the "new rules" are basically the same:

Therefore, the “new rules” are more like general operating principles and regulatory norms, helping virtual asset fund management companies to constrain behavior in practice and provide general operational guidelines, which can be seen as a virtual asset version of the Code of Conduct.

Third, the main content

After comparing the “New Regulations” with the “Factors' Code of Conduct”, we extracted the main differences in the “New Regulations” and summarized them as follows (the following numbers are numbered in the “New Regulations” and the corresponding page numbers. ):

3.7 First release of P10

This section refers to some basic requirements for virtual fund management companies to participate in the first token issue, which corresponds to the requirements of the Fund Managers Code of Conduct 3.7 fund managers to participate in initial public offerings (IPOs).

4. Custody (referred to as “Custody” in the Fund Managers Code of Conduct, English version is “Custody”) P13

In the Custody section, the “New Regulations” and “Factors' Code of Conduct” have changed a lot. Some important contents are: (a) Virtual fund management companies need to monitor the trading platform and custodian's IP address and wallet address; (b) Virtual funds The management company needs to open a separate bank account to receive and manage the client's legal currency; (c) The virtual fund management company needs a very comprehensive assessment of the advantages and disadvantages, characteristics and characteristics of different custodial arrangements (such as who keeps, keeps the address, online and offline, etc.) Characteristics (such as security measures, supporting assets, forklift upgrades, etc.); (d) Virtual fund management companies may choose to keep or appoint independent custodians for custody; (e) Virtual fund management companies shall assess the qualifications of independent custodians in detail, The custodial arrangements for virtual assets are disclosed to fund investors in detail.

5.3 Saving records P17

This section refers to the virtual fund management company should maintain: (a) a record and documents of not less than 7 years; (b) a transaction instruction involving not less than 2 years of all virtual assets purchased and sold by the virtual fund management company And records.

Appendix 1 – Additional Provisions for Virtual Asset Entrusted Account Management Companies P25

This section describes some of the additional requirements that need to be adhered to if a virtual asset management company is engaged in entrusted account management, including: (a) Target customers – only provide entrusted account management services to investors and should assess the qualifications of investors; b) Suitability – The Virtual Assets Fund Management Company should assess whether the portfolio is appropriate for the client and record the results of the assessment; (c) Customer Agreement – ​​a written agreement with the client to establish an entrusted account management; (d) Investment performance And valuation report – a report on the investment performance and portfolio valuation of the entrusted account is provided to the client twice a year.

Appendix 2 – Risk Management Monitoring Techniques and Procedures – Counterparty Risk P29

The counterparty risk of the virtual asset fund management company mentioned in this section is mainly in the description of the credit reliability of the counterparty such as “virtual asset trading platform”, which is divided into 10 angles. It is also mentioned that for virtual asset trading platforms and custodians, virtual asset fund management companies should set appropriate ceilings to avoid excessive concentration of risks.

Appendix 2 – Risk Management Monitoring Technologies and Procedures – Operational and Network Security Risks P29

This section refers to some of the risk isolation methods used by virtual asset fund management companies, network security tools, and some operational arrangements throughout the operational cycle, from setup to completion.

Appendix 3 Risk Disclosure Statement P31

This section refers to the fact that virtual asset fund management companies should disclose the risks associated with virtual assets invested by potential fund investors and fund distributors, which are divided into 10 aspects.

It should be noted that the above summary is based on our understanding of the “new rules”, and some differences that we do not understand are not listed. The differences between the Fund and the Fund Managers' Code of Conduct should still be consulted. We have identified the sections with the main different content above for easy reference.

Link to the Fund Manager's Code of Conduct: https://www.sfc.hk/web/EN/assets/components/codes/files-current/web/codes/fund-manager-code-of-conduct/fund-manager- Code-of-conduct.pdf

Link to the Standard Terms and Conditions for Licensed Corporations for Managing Portfolios Investing in Virtual Assets: https://www.sfc.hk/web/TC/files/IS/publications/VA_Portfolio_Managers_Terms_and_Conditions_(TC).pdf