Full interpretation of the new version of the Hong Kong Securities and Futures Commission’s Circular on Virtual Assets Intermediaries

Comprehensive Analysis of the Latest Hong Kong Securities and Futures Commission Circular on Virtual Assets Intermediaries

Author: BitCoala; Source: Bitkoala Finance

On October 20th, the official website of the Hong Kong Securities and Futures Commission (SFC) released a new version of the joint circular on intermediary-related virtual asset activities with the Hong Kong Monetary Authority (HKMA), replacing the old version published on January 28th, 2022.

In Hong Kong’s capital markets, intermediaries usually refer to individuals and companies who have securities or equity distribution qualifications and comply with relevant guidelines. The SFC stipulates that only such individuals can enter the industry and must comply with the Securities and Futures Ordinance and the relevant subsidiary regulations formulated for regulating intermediaries.

So, what are the key points in the new version of the joint circular on intermediary-related virtual asset activities? Bitkoala Finance will provide a detailed interpretation in this article.

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Can virtual asset-related products be distributed? Yes, but additional investor protection measures must be taken

The SFC believes that virtual asset-related products are likely to be regarded as complex products, such as virtual asset ETFs and virtual asset ETPs. Therefore, intermediaries distributing virtual asset-related products considered as complex products should comply with the SFC’s regulations on the sale of complex products, including ensuring the suitability of virtual asset-related products.

The SFC and HKMA require two additional investor protection measures for distributing virtual asset-related products:

1. Sales restriction – Virtual asset-related products considered as complex products should only be sold to professional investors.

2. Virtual asset knowledge assessment – Before intermediaries carry out trading of virtual asset-related products on behalf of clients, they should assess the client’s knowledge of investing in virtual assets or virtual asset-related products. If the client lacks relevant knowledge, the intermediary can only execute the transaction after providing sufficient training to the client on the nature and risks of virtual assets. The intermediary should also ensure that the client has sufficient net assets to be able to bear the risks and potential losses from buying and selling virtual asset-related products.

However, for derivative products traded on cryptocurrency virtual asset exchanges regulated by the SFC, if there is no solicitation or advisory activities involved, intermediaries can distribute these products without having to comply with the suitability requirements (but they must comply with the existing regulations on derivative products).

Can virtual asset trading services be provided? Yes, but only in collaboration with SFC-licensed platforms

The SFC and HKMA stipulate that intermediaries can only provide virtual asset trading services in collaboration with SFC-licensed virtual asset trading platforms (SFC-licensed platforms), whether through introducing clients to the relevant platforms for direct trading or opening comprehensive accounts with the platforms.

When providing virtual asset trading services, intermediaries should comply with all relevant regulatory requirements imposed by the Securities and Futures Commission (SFC) and the Monetary Authority (MA). In addition, intermediaries should only provide such services to clients who receive their regulated activities of Type 1. The SFC (and, where appropriate, after consulting the MA) will impose conduct requirements that intermediaries should comply with when providing virtual asset trading services through a comprehensive account arrangement, as a licensing or registration condition, and require intermediaries to adhere to the specified terms and conditions.

Can virtual asset management services be provided? Yes! But only less than 10% of the total asset value in the client’s investment portfolio can be invested in virtual assets.

The SFC and the MA specify that intermediaries providing portfolio management services for virtual assets and managing virtual asset trust accounts must comply with the minimum exemption requirements and adhere to the standard terms and conditions applicable to licensed corporations or registered institutions managing investments in virtual assets. If Type 1 intermediaries are authorized by their clients to provide virtual asset trading services in the form of an agency, these intermediaries should only invest less than 10% of the total asset value in the client’s investment portfolio in virtual assets.

Can advice be provided on virtual assets? Yes! But only for clients who receive the services of Type 1 or Type 4 regulated activities from intermediaries.

The SFC and the MA require intermediaries, regardless of the nature of virtual assets, to comply with all relevant regulatory requirements imposed by the SFC and the MA when providing advice. The service should only be limited to clients who receive services of Type 1 or Type 4 regulated activities from intermediaries, and intermediaries should also adhere to the responsibility of providing reasonable and appropriate advice to clients.

When advising any virtual assets to retail clients, intermediaries should take all reasonable steps to ensure that the recommended virtual assets:

1. Have high liquidity. When assessing the liquidity of specific virtual assets traded by retail clients, intermediaries should ensure that the virtual assets are qualified large virtual assets, i.e., the virtual asset should have been included in at least two accepted indexes launched by at least two different index providers; and

2. Are provided to retail investors for trading by licensed platforms regulated by the SFC.

Summary

This revised circular on intermediary activities related to virtual assets sets out the extent to which retail investors can further participate in the virtual asset sector through intermediaries, and allows investors to directly deposit virtual assets with intermediaries. The SFC has allowed licensed virtual asset trading platforms to provide services to retail investors and recognized multiple virtual asset futures exchange-traded funds for public offering in Hong Kong.

With the booming development of the Hong Kong Web3 market, there are more and more inquiries about distributing virtual asset-related products to investors, and the number of intermediaries interested in providing virtual asset trading services to clients is also increasing. As the SFC said, the rapid development of the virtual asset field and its expansion into the mainstream financial industry make it necessary to review the policies formulated by intermediaries engaged in virtual asset-related activities.

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