State of HK Crypto Regulation - Part 1 - HKSFC

Here is what you need to know on the current state of crypto and blockchain regulations in Hong Kong!

The Hong Kong Securities and Futures Commission (HKSFC)

HKSFC to date issued two regulatory frameworks on crypto and blockchain industry: i) Statement on regulatory framework for virtual asset portfolios managers, fund distributors and trading platform operators issued 1 Nov 2018; ii) Statement on Security token offerings issued 28 Mar 2019.

Below are the key summary of the regulatory framework: 

a)    STO Regulation

The statement on 28 Mar 2019 indicated that Security Tokens are considered to be “securities” under the Securities and Futures Ordinance (SFO) – any person and intermediary who handle and distribute the Security Tokens in Hong Kong is required to obtain the licensed or registered Type 1 regulated activity under the SFO. It is a criminal offence to distribute Security Tokens without licenses, unless an exemption applies.

HKSFC also stated that Intermediaries that handled and distribute Security Tokens should comply with paragraph 5.2 of the Code of Conduct as supplemented by the Suitability FAQs and conduct due diligence on STOs.

Security Tokens should only be offered to professional investors. Intermediaries distributing the security tokens should conduct proper research to gain thorough understanding on STOs. These include the background research of management and developer team, alongside the assets that back the Security Tokens. It is also the intermediaries’ responsibility to explain STOs in a clear and easily comprehensible manner. 

b)   What are virtual assets?

HKSFC defined virtual assets as: i) Digital tokens (such as digital currencies, utility tokens or tokens backed by assets or securities); ii) Other crypto assets and virtual commodities in same nature 

c)    Virtual Asset Portfolio Managers

Virtual Asset Portfolio Managers are required to be licensed and registered under HKSFC under the following scenarios:

HKSFC license for Type 1 regulated activity (Dealing in securities)

Portfolio managers solely invest and distribute virtual assets that are not “securities” or “future contracts”.

HKSFC license for Type 9 regulated activity (Asset Management)

Portfolio managers intend to invest 10% or more of the gross asset value (GAV) of the portfolios under its management in virtual assets, irrespective of whether these virtual assets are “securities” or “future contracts”. 

d)   Virtual Asset Fund Distributors

Firms which distribute funds that invest solely or partially in virtual assets in Hong Kong need to be registered for HKSFC Type 1 License (Dealing in securities).

e)    Virtual Asset Trading Platforms

HKSFC has set up a Regulatory Sandbox to explore whether virtual asset trading platforms are suitable for regulation. In the initial exploratory stage, HKSFC will observe the live operations of trading platforms and will not grant a license to them. If HKSFC determines that the trading platform is suitable for regulation, a license will be granted and the platform will proceed to the next stage of Sandbox.