“Have you seen the SFC and HKMA’s recently published “Joint circular on intermediaries’ virtual asset-related activities”? The joint circular extends existing regulatory requirements (and supersedes the SFC’s 1 November 2018 circular on “distribution of virtual asset funds”) to registered institutions and licensed corporations that provide virtual asset distributing; dealing; and advisory services.
“Virtual assets” refers to digital representations of value which may be in the form of digital tokens (such as utility tokens, stablecoins or security- or asset-backed tokens) or any other virtual commodities, crypto assets or other assets of essentially the same nature, irrespective of whether or not they amount to “securities” or “futures contracts” as defined under the Securities and Futures Ordinance, but excludes digital representations of fiat currencies issued by central banks.
The additional investor protection measures for virtual asset-related products are not surprising. However, relevant intermediaries should carefully consider the implications. The following areas are particularly noteworthy:
- The additional conduct requirements applicable to intermediaries providing these virtual asset services, will be imposed via licensing conditions: for intermediaries that provide virtual asset dealing services, apart from the expected standards on disclosure and suitability (including the introduction of a virtual assets knowledge test described similarly to a previous knowledge requirement for derivative products – a reminder of the SFC’s 28 May 2010 circular on the “Guidance to Licensed Corporations and Registered Institutions in relation to Investor Characterization and Professional Investors Requirements”), there are specific conditions which mean that virtual assets will be subject to similar requirements to those under the Contract Note Rules and Client Money Rules. By way of example, clients must be provided with contract notes no later than the end of the second business day after entering into a contract for dealing in virtual assets; whereas client money must be held in segregated bank accounts.
- Also notable is the requirement that intermediaries providing virtual asset dealing services must do so through an SFC-licensed platform (i.e. they should only establish and maintain an omnibus account with an SFC-licensed platform and/or should only execute transactions through such platforms). We would see this as a development further complementing the voluntary opt-in licensing regime for virtual asset trading platforms.
- The requirement that clients can only deposit and withdraw fiat currencies with an intermediary (and may not do so with respect to virtual assets, even after the account is closed).
- For registered institutions wishing to provide virtual asset discretionary account management services, they must inform the SFC and the HKMA and will be required to comply with the RA9 Terms and Conditions?- which previously only applied to licensed corporations (see the SFC’s 1 November 2018 circular on “statement on regulatory framework for virtual asset portfolios managers, fund distributors and trading platform operators”).
- For intermediaries already engaging in virtual assets related activities, there will be a six-month transition period for intermediaries to fully implement the expected requirements in the circular.
If you have questions about the aspects we have highlighted or any other part of the joint circular, ?contact Charlotte Robins, Andre Da Roza, Bernita Lun or Hysan Chan
