Recent regulatory developments in virtual asset products

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Authored by: Su Cheen Chuah and Mary Nieto

The Hong Kong Government has recently issued a policy statement on the development of virtual assets (VA). It outlines the Government’s approach “towards developing a vibrant sector and ecosystem” for VA in Hong Kong. On 31 October 2022, Julia Leung, the SFC’s Deputy CEO, issued a keynote address on the regulation of the crypto community at the Hong Kong FinTech Week 2022.

In this article we highlight a few key initiatives in the regulation of VA.

Licensing of VA service providers

The Government plans to implement a licensing regime for virtual asset service providers (VASP). A bill was gazetted in June 2022 and is currently under the legislative review process. As the Government points out in its policy statement, “financial intermediaries and banks will be able to partner with licensed VA exchanges when offering clients with VA dealing services, provided that relevant regulatory conditions are met”. One of the licensing conditions is that services should be limited to professional investors. For further details, please see our previous publication Final shape of the licensing regime for virtual asset service providers.

Retail access to VA products

Relaxation of professional investor requirement

The Government’s policy statement announced that the Securities and Futures Commission (SFC) will be conducting a public consultation on how retail investors may be given a suitable degree of access to VA under the new licensing regime. Ms Leung addressed this in her speech, “the SFC is minded to consult the public on whether the professional-investor-only requirement could be relaxed; and if so, what should be the governance procedures and listing criteria for the VASP to admit tokens for secondary market trading by retails investors”. The SFC is undergoing a soft consultation of the industry and stakeholders and will issues its public consultation in due course.

VA futures ETFs

Ms Leung announced in her speech that the SFC “has been actively looking to set up a regime to authorise ETFs which provide exposure to mainstream virtual assets with appropriate investor guardrails”, and that the SFC would later that day issue a circular on the authorisation of VA futures ETFs for public offering in Hong Kong. She said “Apart from the existing requirements for ETFs, virtual asset futures ETFs will also be subject to additional requirements related to is management company, investment strategy, disclosure and investor education.”

These additional requirements include the following:

• the management company of a VA futures ETF is required to (i) have a good track record of regulatory compliance; and (ii) demonstrate at least three years’ proven track record in managing ETFs;
• initially, only Bitcoin futures and Ether futures traded on the Chicago Mercantile Exchange are allowed;
• a VA futures ETF is expected to adopt an active investment strategy; and
• the net derivative exposure (as defined under the Code on Unit Trusts and Mutual Funds) of a VA futures ETF shall not exceed 100% of the ETF’s total net asset value.

Further details are set out in the circular on “Virtual Asset Futures Exchange Traded Funds”.

Market commentators have noted that the SFC is adopting a more permissive stance with regards to retail access to VA products as compared with Singapore’s MAS.

Key Contacts

Su Cheen Chuah

Partner | Financial Services

Email or call +852 2825 9651

Mary Nieto

General Counsel | Financial Services

Email or call +852 2826 5366