Hong Kong’s SFC, tightens rules on virtual asset products for investors

October 25, 2023

By Sharan Kaur Phillora

In light of recent advancements within the digital asset realm, Hong Kong’s Securities and Futures Commission (SFC) has revamped its regulatory framework governing virtual asset products and platforms to bolster retail investor protection and industry transparency. These updates come as part of a larger plan to align the rapidly evolving digital asset sector with traditional financial regulatory standards.

Here’s what we know:

A core feature of the updated policy is the restriction on the sale of complex virtual asset products to retail investors, aiming to shield them from potentially risky or obscure products. This initiative underscores intermediaries’ need to gauge clients’ understanding of virtual asset risks and fundamentals. 

In case of inadequate knowledge, intermediaries must provide comprehensive training to ensure a well-informed clientele. These measures extend to ensuring that clients possess adequate financial capacity to mitigate possible losses during virtual asset transactions​.

The new regulatory framework, which took effect on June 1, 2023, following extensive discussions and consultations, represents a collaborative effort among government bodies, regulators, industry stakeholders, and the broader crypto community in Hong Kong to foster a structured and sustainable growth of the crypto ecosystem​.

This framework was devised after the SFC released its “Consultation Conclusions on the Proposed Regulatory Requirements for Virtual Asset Trading Platform Operators” on May 23, 2023​.

A pivotal aspect of this revised framework is the licensing regime under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance for virtual asset service providers. This regime encompasses those providing centralized virtual asset trading platforms (VATPs) using automated trading engines, aligning with the SFC’s traditional regulatory approach towards automated trading venues. A dual licensing arrangement is also maintained to ensure business continuity and compliance with existing regulatory provisions. 

VATPs are now required to adhere to robust investor protection measures covering onboarding, governance, disclosure, and token due diligence before engaging retail investors. Specific criteria have been outlined for tokens eligible for trading by retail investors, and until stablecoins are regulated in Hong Kong, they are not to be admitted for retail trading​.

Furthermore, the SFC has set forth guidance for Platform Operators on various factors to consider when conducting due diligence on virtual assets. These include, among others, the regulatory status of a virtual asset in Hong Kong, the technical aspects of a virtual asset, and the legal risks associated with the virtual asset and its issuer​.

Hong Kong’s SFC aims to foster a more secure, transparent, and educated virtual asset market, aligning with global trends towards more stringent oversight in the digital asset domain.

About the author

Sharan Kaur Phillora’s thirst for knowledge has led her to study many different subjects, including NFTs and Blockchain technology – two emerging technologies that will change how we interact with each other in the future. When she isn’t exploring a new idea or concept, she enjoys reading literary masterpieces.

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