On November 1, the Hong Kong Securities and Futures Commission issued new regulations on virtual assets, requiring that funds with more than 10% of their asset size (AUM) belonging to virtual assets can only be sold to professional investors. Any funds and brokerage institutions that invest in virtual assets need to register with the China Securities Regulatory Commission.
The new regulations require companies that manage funds that invest entirely in virtual assets that do not constitute "securities" or "futures contracts" and distribute such funds in Hong Kong to obtain a license to manage a portfolio of "securities" and/or "futures contracts". Companies that have or are required to apply for a Type 9 regulated activity (provision of asset management) license will be regulated by the SFC.
The SFC believes that the regulatory guidance under the conceptual framework, once implemented, can provide a compliance path for platform operators who are able and willing to comply with strict standards and operating practices, and can combine licensees with those who do not intend to apply. There is a distinction between licensed operators.
The China Securities Regulatory Commission will also work with operators of virtual asset trading platforms that are interested in and have committed to comply with the strict standards they should meet, include them in the China Securities Regulatory Commission's regulatory sandbox, and issue licenses to exchanges after regulatory verification of feasibility.
The following is the original text of the Hong Kong Securities and Futures Commission’s virtual currency regulatory regulations:
The Securities and Futures Commission (SFC) is concerned that investors are increasingly interested in acquiring virtual assets through funds and unlicensed trading platform operators in Hong Kong. The Securities and Futures Commission has identified significant risks arising from investing in virtual assets, as detailed below. To address these risks, the China Securities Regulatory Commission is currently issuing guidance on the regulatory standards that virtual asset portfolio management companies and fund distributors should meet, and is exploring a conceptual framework that could regulate virtual asset trading platform operators.
background
Technology is changing the face of finance. Distributed ledger technology provides a way to digitally record ownership of virtual assets anonymously and helps facilitate peer-to-peer transactions. Virtual assets express value in digital form and are also known as "cryptocurrencies," "cryptoassets," or "digital tokens." Such assets are characterized by taking different forms and evolving, meaning they can be or claim to be a method of payment, or entitle the token holder to current or future profits, or access to products. or services, or any combination of the above.
Since the launch of Bitcoin, the most widely known digital token, in 2008, global public interest in virtual assets has doubled. The market capitalization of Bitcoin and other digital tokens peaked in early January 2018 and is estimated to be over $800 billion(1). Currently, there are more than 2,000 different digital tokens being bought and sold around the world, with an estimated total market value of over $200 billion. Although the total market capitalization of digital tokens has dropped significantly from its peak, there is still a large amount of trading volume. In addition, the market demand for funds investing in virtual assets is also growing.
Although virtual assets do not pose a significant risk to financial stability(2), securities regulators generally believe that virtual assets pose a significant risk to investor protection. Regulatory responses to these risks vary across jurisdictions, depending on the scope of regulatory powers, the scale of relevant activities and their impact on investor interests, and whether virtual assets are considered financial products suitable for regulation.
According to Hong Kong’s current regulatory system, if the virtual assets involved do not fall within the legal definition of “securities” or “futures contracts” (or equivalent financial instruments), their markets may not be regulated by the SFC. Therefore, investors who trade virtual assets through unregulated trading platforms or invest in virtual asset portfolios managed by unregulated portfolio management companies will not be able to enjoy the benefits stipulated in the Securities and Futures Ordinance. Safeguards, such as regulations to ensure safe custody of assets and fair and open markets. If platform operators and portfolio managers are not regulated, their suitability (including financial soundness and capabilities) will not be assessed and their operations will not be subject to any monitoring.
Risks associated with investing in virtual assets
Virtual assets pose significant risks to investors, partly due to the inherent nature and characteristics of the virtual assets themselves and partly due to the operations of virtual asset trading platforms or portfolio management companies.
Valuation, Volatility and Liquidity
Virtual assets generally lack the support of physical assets or government guarantees and have no actual value. Currently, there are no generally accepted valuation principles for certain virtual asset classes. Prices in the secondary market are affected by supply and demand and are transient and volatile. If the virtual asset pool is small and dispersed, the volatility faced by investors may further expand.
Accounting and Auditing
There are no agreed standards and industry practices within the accounting profession that specify how auditors should perform assurance procedures to obtain sufficient audit evidence regarding the physical existence and ownership of virtual assets and to determine the valuation of virtual assets. reason.
Cybersecurity and safe custody of assets
Trading platform operators and portfolio management companies may store client assets in online wallets (i.e. in an online environment with an Internet interface), and online wallets are vulnerable to hackers. Cyber attacks lead to hackers intruding into virtual asset trading platforms and resulting in the theft of virtual assets. Victims may have difficulty recovering losses from hackers or trading platforms, which can run into hundreds of millions of dollars.
Virtual asset funds face unique challenges due to the limited number of qualified custody solutions available; and existing solutions may not be fully effective.
Market integrity and stability
Unlike regulated stocks, virtual asset markets are still in their infancy and do not operate under an accepted, transparent set of rules. Operational disruptions, market manipulation and irregular activities occur from time to time, which may result in investor losses.
Money laundering and terrorist financing risks
Virtual assets are typically purchased, sold, or held in a bearer manner. In particular, platforms that allow the exchange of fiat currencies and virtual assets inherently carry higher risks of money laundering and terrorist financing activities. If criminal activity is involved, investors may not be able to recover their investment due to law enforcement actions.
conflict of interest
Virtual asset trading platform operators can act as clients’ agents or principals. Virtual asset trading platforms, such as traditional exchanges, alternative trading systems or securities brokers, can facilitate the initial distribution of virtual assets (such as initial coin offerings) and/or secondary market trading. If these operators are not regulated by any regulatory agency, conflicts of interest will be difficult to detect, monitor and manage.
Fraud
Virtual assets may be used as a means to defraud investors. A virtual asset trading platform operator or portfolio management company may not conduct adequate product due diligence before allowing virtual assets to be bought and sold on its platform or investment in virtual assets for its portfolio. As a result, investors may fall victim to fraud and lose their investment.
Existing regulatory system
The China Securities Regulatory Commission has issued multiple notices clarifying its regulatory stance on virtual assets (3). If virtual assets fall within the definition of “securities” or “futures contracts,” then such products and related activities may fall within the regulatory scope of the Securities and Futures Commission. The Securities and Futures Commission also reminded intermediaries in a circular (4) dated June 1, 2018 that if they intend to provide trading and asset management services involving crypto-assets, they must comply with the provisions of the Securities and Futures (Licensing and Registration) Notice (information) rules.
The SFC has taken a range of actions, including providing regulatory guidance, issuing warnings and compliance letters, and taking regulatory action against persons who may be in breach of SFC rules and regulations when carrying out virtual asset-related activities(5).
However, many virtual assets do not constitute "securities" or "futures contracts." In addition, managing funds that only invest in virtual assets that do not constitute "securities" or "futures contracts" does not constitute a "regulated activity" under the Securities and Futures Ordinance. Likewise, platform operators that only provide trading services for virtual assets that do not fall within the definition of “securities” are not subject to CSRC supervision. Notwithstanding the foregoing, if a company engages in the distribution of funds that invest in virtual assets, it must be licensed or registered by the Securities and Futures Commission regardless of whether the assets constitute "securities" or "futures contracts."
1. Supervisory Guidelines for Virtual Asset Portfolio Management Companies and Fund Sales Agencies
When the China Securities Regulatory Commission exercises its regulatory power, if it follows the traditional approach of classifying financial products as "securities" or "futures contracts," many virtual asset investors will not be protected. The China Securities Regulatory Commission decided to take an approach with a higher probability of success and bring most virtual asset portfolio management activities into the scope of supervision. The key principles of the regulatory framework and regulatory standards are summarized below.
(a) Virtual Asset Portfolio Management Company
(1) Monitoring scope
The following categories of virtual asset portfolio management companies will be subject to supervision by the China Securities Regulatory Commission:
o Companies that manage funds that invest entirely in virtual assets that do not constitute “securities” or “futures contracts” and distribute such funds in Hong Kong
o As such companies distribute these funds in Hong Kong, they are usually required to obtain a Type 1 regulated activity (dealing in securities) license.The SFC will also regulate the activities of managing these funds by imposing licensing conditions; and
o Firms that hold or are required to apply for a Category 9 Regulated Activity (Provision of Asset Management) license to manage a portfolio of “securities” and/or “futures contracts”
o The SFC will also impose licensing conditions and supervise related management work.
(2) Supervision standards
In order to provide better protection to investors, the SFC believes that if a licensed portfolio management company intends to invest in virtual assets, even if the investment portfolio (or part of the investment portfolio) it manages invests in virtual assets in whole or in part, regardless of whether these virtual assets Whether constituting a “security” or a “futures contract” (7), they are subject to essentially the same regulatory requirements (8).
To this end, the SFC has developed a set of standard terms and conditions (Terms and Conditions) that incorporate key provisions of existing regulations, modifying them as necessary to more effectively address the risks associated with virtual assets. For example, only professional investors who meet the definition of the Securities and Futures Ordinance can invest in any virtual asset portfolio (subject to meeting minimum exemption requirements). These terms and conditions are principles-based and therefore should generally be suitable to be imposed on virtual asset portfolio management companies as conditions of license, but may need to be slightly modified and clarified based on the business model of the individual management company. Some of the main terms and conditions are set out in Appendix 1 of this Statement "Regulatory Standards Applicable to Licensed Corporations Managing Virtual Asset Investment Portfolios".
(iii) Licensing procedures
If license applicants and licensed corporations currently manage or plan to manage one or more investment portfolios investing in virtual assets, they must notify the SFC(9); after the SFC is informed of the relevant situation, it will first seek to understand the company's business activities . If the company appears to be capable of meeting the regulatory standards it is expected to meet, the SFC will provide it with proposed terms and conditions (if applicable) and the SFC will discuss with the company and make changes based on its specific business model to ensure that the proposal The terms and conditions in are reasonable and appropriate.
If a license applicant does not agree to abide by the proposed terms and conditions, his or her license application will be refused. Similarly, if existing licensed corporations own virtual asset portfolios but do not agree to comply with the proposed terms and conditions, they will be required to wind up virtual asset trading within those portfolios within a reasonable period.
The proposed terms and conditions will be imposed as license conditions with the consent of the license applicant or licensed corporation.
If a licensed corporation fails to comply with the licensing conditions, it is likely to be deemed to have committed misconduct under the Securities and Futures Ordinance. This will have a negative impact on their health and fitness and may result in regulatory action by the Securities and Futures Commission.
(b) Virtual asset fund distributors
Companies issuing funds in Hong Kong that invest (in whole or in part) in virtual assets will need to be licensed or registered for Type 1 regulated activity (dealing in securities). Therefore, such firms must comply with existing requirements when allocating these funds, including the obligation to provide appropriate advice. In view of the significant risks posed to investors, the China Securities Regulatory Commission issued the "Notice to Intermediaries on the Agency Sales of Virtual Asset Funds" on November 1, 2018, stipulating the standards and operating specifications that should be met for the agency sales of virtual asset funds. Further guidance.
Under this arrangement, virtual asset funds offered in Hong Kong that are not themselves managed by companies referred to in Part I (Funds)(i) will still be managed by Part I(b). The stocks issued by the above-mentioned companies are subject to the supervision of the China Securities Regulatory Commission. In this way, the management and distribution of these funds will always be subject to the supervision of the Securities Regulatory Commission.
2. Explore the supervision of platform operators
On the other hand, the China Securities Regulatory Commission also elaborated on the conceptual framework of possible supervision of virtual asset trading platforms in this statement, with a view to exploring whether it is appropriate to supervise virtual asset trading platforms and drawing conclusions after the exploratory stage. If the SFC proposes to license any virtual asset trading platform, it is recommended that the regulatory standards of conduct for virtual asset trading platform operators should be similar to those applicable to existing licensed automated trading service providers.
The SFC believes that the regulatory guidance under the conceptual framework, once implemented, can provide a compliance path for platform operators who are able and willing to comply with strict standards and operating practices, and can combine licensees with those who do not intend to apply. There is a distinction between licensed operators.
Some of the world's largest virtual asset trading platforms appear to operate in Hong Kong, but are outside the regulatory scope of the Securities and Futures Commission(10) and any other regulatory agencies. Given the seriousness of investor protection issues and taking into account international developments, the SFC believes it is necessary to seriously and comprehensively explore whether (and if so) and how virtual asset trading platforms should be regulated under existing powers.
In order to conduct meaningful research on this conceptual framework, the CSRC will work with those virtual asset trading platform operators that intend and have demonstrated their commitment to comply with the strict standards they are expected to meet by including them in the CSRC regulatory sandbox(11).
In the preliminary exploration stage, the China Securities Regulatory Commission will not issue licenses to platform operators; instead, it will discuss with the platform operators the regulatory standards that should be met and observe the actual operations of the virtual asset trading platform based on these standards. The SFC will also consider the effectiveness of its proposed regulatory requirements in addressing risks and providing appropriate investor protection, and will rigorously consider whether a virtual asset trading platform is actually suitable to be regulated by the SFC based on its performance in the sandbox. Supervision. . Factors that will be considered include the adequacy and effectiveness of the proposed conceptual framework; the ability to comply with the terms and conditions; investor interests; and local market and international regulatory developments.
Given the inherent characteristics of the platform operator's relevant technology or business model, the SFC may ultimately conclude that the risks involved cannot be appropriately handled in accordance with its recommended standards, and investors cannot be protected. In this case, the SFC may decide that the platform operator should not be subject to SFC regulation. For example, due to the key feature of anonymity of blockchain technology related to virtual assets, the China Securities Regulatory Commission is currently unsure whether platform operators can meet the standards for combating money laundering. The SFC will also need to consider the rapid development of the entire virtual asset industry, as well as international regulatory developments, including the work carried out by the International Organization of Securities Commissions (IOSCO). This exploratory stage is important for the CSRC to understand the actual operations of platform operators and determine whether these platforms are suitable for supervision. Only if the CSRC makes a positive judgment at the end of this stage will it consider issuing licenses to qualified platform operators. To avoid public confusion about the regulatory status of platform operators, the identity of the sandbox applicants and details of related discussions will be kept confidential at this stage.
If the CSRC issues a license to a qualified platform operator, appropriate licensing conditions will be imposed and the operator will move to the next stage of the sandbox. This generally means that operators need to report, undergo supervision and review more frequently so that they can implement strict internal controls under the close supervision of the CSRC and resolve any issues that the CSRC raises as a result of the conduct of their business. . The China Securities Regulatory Commission can also further consider or improve supervision methods through close communication with these operators when operating in the sandbox. After at least 12 months, virtual asset trading platform operators can apply to the China Securities Regulatory Commission to cancel (12) or modify some license conditions and exit the sandbox. Licensing conditions (and terms and conditions) imposed at this stage will be made public as usual.
The details of the conceptual framework are set out in Appendix 2 "Conceptual Framework for Regulating Virtual Asset Trading Platform Operators".
The SFC will monitor the development of virtual asset-related activities and may issue further guidance in due course.
If market participants have any questions, please contact the FinTech Liaison Office (@sfc.hk).
Securities and Futures Commission
标签： #Hong Kong Securities and Futures Commission #Investment Portfolio #Fund Risk #Management Risk #Risk Assets
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