By HENRY YU & ASSOCIATES
On 28 January 2022, the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) issued the Joint Circular on intermediaries’ virtual asset-related activities (Joint Circular), replacing the 2018 Circular on the distribution of virtual asset funds. Recognizing the evolving virtual asset (VA) landscape, the Joint Circular outlines an updated regulatory framework for distributing VA-related products, providing VA dealing services, and offering VA advisory services.
A. Distribution of VA-Related Products
The SFC and HKMA classify VA-related products as likely “complex products” (Complex VA-Related Products), subject to:
- Existing Complex Product Regime: Compliance with suitability tests and due diligence obligations, as per paragraph 5.5 of the Code of Conduct and Chapter 6 of the Guidelines on Online Distribution and Advisory Platforms.
- Professional Investor-Only Restriction: Complex VA-Related Products can only be offered to professional investors, as defined in section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance (SFO) (paragraph 7.1, Joint Circular).
- VA Knowledge Test Requirement: Except for institutional professional investors (e.g., recognized exchanges, licensed corporations) and qualified corporate professional investors, intermediaries must conduct a VA Knowledge Test to assess clients’ knowledge of VAs or VA-related products before transacting (paragraph 7.2, Joint Circular). Knowledge criteria include training, work experience, or prior trading (e.g., 5+ transactions in 3 years; see Appendix 1, Joint Circular).
Certain VA-related derivative products, traded on SFC-specified regulated exchanges or permitted for retail investors in designated jurisdictions, are exempt from the Professional Investor-Only Restriction (Exempted VA Derivative Products). These products, considered similar to traditional regulated market products with transparent pricing, remain Complex VA-Related Products, subject to derivative product requirements (paragraphs 5.1A and 5.3, Code of Conduct) and the VA Knowledge Test Requirement (paragraph 8, Joint Circular).
B. Provision of VA Dealing Services
The SFC and HKMA permit only intermediaries licensed for Type 1 regulated activity (dealing in securities) to provide VA dealing services, partnering exclusively with SFC-licensed VA trading platforms (currently only OSL, operated by BC Technology Group Limited, Stock Code: 863). Key requirements include:
- Services limited to existing clients who are professional investors (paragraph 17, Joint Circular).
- Compliance with SFC and HKMA regulations, regardless of whether VAs are securities or non-securities (paragraph 18, Joint Circular).
(a) Introducing Agent Arrangement
- Clients introduced to VA trading platforms must be professional investors.
- Intermediaries cannot trade on behalf of clients or hold client assets (fiat currencies or VAs) via these platforms (paragraph 21, Joint Circular).
(b) Omnibus Account Arrangement
- Intermediaries with omnibus accounts on VA trading platforms may only allow clients to deposit or withdraw fiat currencies, not VAs, to mitigate transfer risks (paragraphs 19 and 20, Joint Circular).
C. Provision of VA Advisory Services
Only intermediaries licensed for Type 1 (dealing in securities) or Type 4 (advising on securities) regulated activities may provide VA advisory services, limited to existing professional investor clients (paragraph 24, Joint Circular). These intermediaries must comply with SFC and HKMA regulations, regardless of VA nature (security or non-security), and adhere to the same requirements as VA-related product distribution, including suitability tests and the VA Knowledge Test Requirement (paragraphs 25 and 26, Joint Circular).
Our Observations
With the SFC licensing a VA trading platform (OSL) and VA asset management firms, the Joint Circular clarifies Hong Kong’s regulatory framework, fostering a VA ecosystem. Notably, it allows limited VA-related derivative products traded on regulated exchanges to be offered to retail investors, a step toward mainstream integration. Type 1 intermediaries can now provide VA dealing services via SFC-licensed platforms, with expectations of more platform licenses soon.
On the same date, the HKMA issued a circular permitting banks to invest in VAs, lend against VA collateral, and allow VA purchases via credit cards, provided risk-management controls are in place (page 3, HKMA Circular). Together, these circulars guide licensed brokers, banks, and investment managers in VA-related activities.
The Joint Circular does not directly address retail VA investment. However, the upcoming VASP Licensing Regime (November 2019) will require all crypto-exchanges marketing to Hong Kong to be SFC-licensed, regardless of token nature, but applies only to centralized platforms, excluding OTC and P2P trading. Post-implementation, retail investors’ options may include:
- Purchasing Exempted VA Derivative Products via Type 1 intermediaries.
- Buying non-security VAs through local OTC/P2P desks.
- Trading on overseas platforms.
For questions or further discussion, contact hyu@lylawoffice.com or (+852) 2115-9525.
Disclaimer: The information provided in this article is not intended to be, nor does it constitute, legal advice and is not a substitute for obtaining proper legal advice in respect of any specific issue.
