Hong Kong’s New Regulatory Framework for Crypto Funds Nov 2018

As an initial set of rules were announced by the Securities and Futures Commission (“SFC”) yesterday which could be the first step in developing Hong Kong as a major cryptocurrency hub, we provide a quick overview that covers the following key aspects:

  1. Why does Hong Kong need a new framework
  2. Who does the new framework impact
  3. What is the actual impact

Why does Hong Kong need a new framework?

Crypto funds do not currently benefit from the protections under the Securities and Futures Ordinance (“SFO”) if the virtual assets involved fall outside the legal definition of securities or futures contracts. With this announcement and new framework, the SFC has decided to bring a significant portion of virtual asset portfolio management activities into its regulatory net. This is deemed a positive development to bring in institutional crypto investors in the long run.

Who does the new framework impact?

The new framework covers two broad categories for crypto fund managers:

  • Existing Type 9 asset management licensed fund managers and
  • Non-Existing Type 9 asset management licensed fund managers (typically firms which solely invests in virtual assets such as ICO funds)
Source: https://medium.com/@arslanianhenri/the-new-regulatory-framework-for-crypto-funds-in-hong-kong-10-things-you-need-to-know-594402b35027

Existing Type 9 asset management licensed fund manager

Terms and Conditions via additional licensing would be imposed if the fund manager:

  1. Plans to manage virtual assets
  2. Invest 10%+ gross asset value in virtual assets

If less than 10% of gross asset value is in virtual assets, reasonable steps has to be taken and demonstrated to maintain balance under the threshold.

Funds of Funds will require type 9 asset management license.

Fund managers with no intention to manage virtual assets will not be impacted.

Non-existing Type 9 asset management licensed fund managers

If they solely manage digital assets, these firms will typically require a licence for Type 1 regulated activity (dealing in securities) because they distribute funds in Hong Kong to professional investors.

For funds that deal with digital assets, securities and futures, they will require a Type 9 asset management license.

What is the actual impact

A summary of the key impacts and terms & conditions are as follows:

  • Licensed corporations should only allow professional investors as defined by SFO to invest into their portfolio. The definitions are: HKD8 million+ portfolio (Individual) HKD8 million + portfolio and total assets of not less than HKD40 million (Corporate)
  • Holding virtual assets is considered similar to holding client assets and should follow the capital rules as follows: A corporation with Type 9 license holding client assets must maintain liquid capital of not less than HKD3 million. If it does not hold any client assets, it must maintain required liquid capital of not less than HKD 100,000.
  • In response to the considered virtual asset exchange risks such as hacks which have been common, appropriate caps should also be set to limit the exposure to individual virtual asset exchanges.
  • Licensed corporations should ensure that an independent auditor is appointed to perform an audit of the financial statements of the funds under their management

Further Reading

A great overview piece by Henri Arslanian - Chairman of the FinTech Association of Hong Kong.

News of the announcements by SCMP.com

Apply to the SFC for a Type 9 License (Asset Management)