News & Insights

Licensing conditions for managing virtual assets portfolios

The Securities and Futures Commission (SFC) announced a regulatory framework for virtual assets on 1 November 2018. Our article of 22 November 2018 explains the framework and answers various questions for asset managers. On 4 October 2019, the SFC issued terms and conditions (Terms and Conditions) which licensed corporations will need to comply with when managing portfolios, or portions of portfolios, that invest in virtual assets, such as cryptocurrencies, crypto-assets and digital tokens.

The Terms and Conditions will be imposed by way of a licensing condition on a licensed corporation that manages a fund or discretionary account (or portion of a fund or discretionary account) where either (i) the stated investment objective of the fund or discretionary account is to invest in virtual assets or (ii) the intention of the fund or discretionary account is to invest 10% or more of its gross asset value in virtual assets (Virtual Asset Fund Managers).

The Terms and Conditions make it clear that only “professional investors” (as defined under Schedule 1 to the Securities and Futures Ordinance (SFO)) are allowed to invest in virtual asset funds that are not authorized by the SFC under section 104 of the SFO.

The Terms and Conditions are substantially similar to the requirements set out in the Fund Manager Code of Conduct (FMCC), the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC Code of Conduct) and other requirements under subsidiary legislation of the SFO.

Set out below are the key additional requirements which Virtual Asset Fund Managers should be aware of to ensure compliance with the Terms and Conditions:

1. Financial resources: Maintain at all times a minimum liquid capital of HK$3 million or its variable required liquid capital (whichever is higher).
2. Compliance

  • Establish detailed compliance procedures to ensure compliance with all applicable legal and regulatory requirements (including its licensing conditions).
  • Any deviation from established procedures shall be approved by the compliance officer or other persons designated by senior management.
  • Such approval and reasons for deviation shall be properly documented.
3. Operational control: Establish and maintain effective policies and operational procedures and controls including, but not limited to, controls over trading and safeguard of fund assets, IT systems and infrastructure.
4. Custody

  • Implement and maintain adequate processes and controls when:
(i) creating new accounts with trading platforms and custodians;
(ii) whitelisting new internet protocol addresses or new wallet addresses at trading platforms and custodians; and
(iii) effecting transfer of assets between trading platforms, custodians and wallets held by the Virtual Asset Fund Manager.
  • Assess the pros and cons of custodial arrangement options for holding virtual assets (e.g. independent custodian or self-custody, host locations, use of hot or cold wallets).
  • As part of the selection process, take into account, among other things, the accessibility and security of the custodial facility.
  • Document the reasons for selecting the custodial arrangement.


  • Where self-custody is adopted, ensure effective policies, procedures and internal controls are in place to protect the virtual assets from financial loss arising from theft, fraud, other dishonest acts, professional misconduct or omissions.
  • Specifically, ensure: (i) virtual assets held in self-custody are identified as owned beneficially by the fund through proper record-keeping; (ii) arrangements are in place to effect segregation from the Virtual Asset Fund Manager’s own assets on the Virtual Asset Fund Manager’s insolvency (e.g. make a declaration of trust over the fund’s crypto wallet and all assets held in the wallet).

Appointment of independent custodian

  •  Where an independent custodian is appointed, due skill, care and diligence should be exercised in the selection, appointment and ongoing monitoring of the custodian taking into account the following factors:
(i) the experience and track record of the custodian in providing custodial services for virtual assets;
(ii) the regulatory status of the custodian;
(iii) the corporate governance structure and background of the senior management of the custodian;
(iv) the custodian’s operational capabilities (e.g. the “wallet” arrangements and cybersecurity risk management measures); and
(v) the physical setup and processes in dealing with transfer of assets, blockchain forks and software upgrades.
  • Appoint more than one custodian (if required) to avoid undue concentration risks.
 5. Provision of information: Make adequate disclosure of information which is necessary for fund investors to make an informed decision about their investment (similar to the requirements under the FMCC) including, but not limited to, list of trading platforms and custodians which the fund uses and key risks associated with the fund’s investment in virtual assets (see Appendix 3 to the Terms and Conditions for examples of risks to be disclosed).   


 6. Record keeping

  • Establish and implement effective policies and procedures to ensure the integrity, security, availability, reliability and completeness of all information relevant to the Virtual Asset Fund Manager’s business operations.
  • Retain records or documents in premises which have been approved by the SFC.
  • Keep records or documents for a period of not less than seven years (or for not less than two years in case of records or documents showing particulars of any orders concerning virtual assets that are initiated by the Virtual Asset Fund Manager).
7. Anti-Money Laundering and Counter-Terrorist Financing: Ensure proper safeguards to mitigate the risks of money laundering and terrorist financing, especially in respect of subscriptions made by fund investors using virtual assets.
8. Initial Offerings: Record reasons for differences between the intended and actual allocation of virtual assets received in an initial offering.
9. Marketing: Coordinate with distributors and establish and implement measures to ensure the virtual asset fund is only distributed to “professional investors”.
10. Insurance: Use reasonable endeavours to acquire and maintain adequate insurance over the virtual assets.
11. Report to SFC: Report to SFC as soon as practicable upon happening of any actual or suspected material non-compliance with the Terms and Conditions or any other applicable legal and regulatory requirements.

Appendix 1 to the Terms and Conditions sets out additional requirements that will apply to Virtual Asset Fund Managers managing discretionary accounts, as well as certain requirements of the Terms and Conditions that are not applicable to the management of discretionary accounts. The additional requirements are similar to those applicable under the FMCC and the SFC Code of Conduct on suitability and the minimum content of client agreement.

Key Contacts

Scott Carnachan

Consultant | Financial Services

Email or call +852 2825 9265

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