New rules govern crypto assets

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New rules have been introduced in Hong Kong to shield retail investors from risks associated with investing in crypto assets.

A report published by Pinsent Mason said measures outlined by the Securities and Futures Commission (SFC) in Hong Kong will impact both fund managers and distributors who operate in the city.

In a regulatory statement, the SFC had said volatility, liquidity, fraud and money laundering were among the risks associated with investing in crypto assets, and it highlighted limitations in Hong Kong’s regulatory regime to help it address those risks.

Pinsent Masons advised that while firms that distribute funds which invest in crypto assets are required to be licensed by or registered with the SFC, specific controls on offering investment opportunities in crypto assets have only applied if the assets could be defined as “securities” or “futures contracts”. The SFC said it had therefore decided to bring “a significant portion of virtual asset portfolio management activities into its regulatory net”.

Under the new regime, firms managing funds which solely invest in crypto assets that do not constitute securities or futures contracts but which distribute them in Hong Kong will be subject to a licensing regime.

In addition, Pinsent Masons said companies that are already licensed to manage portfolios including securities and/or futures contracts in Hong Kong will also be subject to licensing conditions where they “intend to invest 10%
or more of the gross asset value (GAV) of the portfolios under its management in virtual assets”.

The SFC has set a number of principles-based terms and conditions for licensees to meet, and warned fund managers that breaching the new requirements will face enforcement action.

“The combined effect of these measures is that the management or distribution of crypto funds will be regulated in one way or another, so that investor interests will be protected either at the fund management level, at the distribution level, or both,” SFC chief executive Ashley Alder said in a recent speech.

The SFC has also set out its intention to consider tighter regulation of cryptoasset trading platforms after identifying “serious investor protection issues”.