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Hong Kong: Regulator sets out approach towards virtual assets

Source: Asia Insurance Review | Dec 2018

Hong Kong’s Securities and Futures Commission (SFC) has issued rules governing virtual assets such as cryptocurrencies, crypto assets and digital tokens in a bid to enhance investor protection.
The rules aim to bring virtual asset portfolio managers and distributors of virtual asset funds under the SFC’s regulatory ambit. The SFC also set out a conceptual framework for the potential regulation of virtual asset trading platforms, commonly known as cryptocurrency exchanges.
The SFC will impose licensing conditions on firms which manage or intend to manage portfolios investing in virtual assets (where at least 10% of the gross asset value of the portfolio is invested in virtual assets), irrespective of whether the virtual assets meet the definition of ‘securities’ or ‘futures contracts’.
Currently, many virtual assets do not meet these two definitions under the Securities and Futures Ordinance (SFO). As such, managing funds solely investing in virtual assets which do not constitute ‘securities’ or ‘futures contracts’ would mean this does not amount to a ‘regulated activity’ as specified under the SFO - a loophole that puts these activities out of the regulatory net.
The new rules comes amid investors seeing huge falls in the value of cryptocurrency like Bitcoin since the start of this year. 
In an accompanying circular, the SFC provided detailed guidance and reminded firms which distribute funds investing in virtual assets that they should be registered with or regulated by the SFC and comply with its regulatory requirements, including the suitability obligations - intermediaries should ensure that the recommendation or solicitation made is suitable for clients in all circumstances - when distributing these funds.
“The measures announced today allow us to regulate the management or distribution of virtual asset funds in one way or another so that investors’ interests would be protected either at the fund management level, at the distribution level, or both,” said SFC CEO Ashley Alder. “We hope to encourage the responsible use of new technologies and also provide investors with more choices and better outcomes.”
The SFC will explore whether cryptocurrency exchanges are suitable for regulation in the SFC regulatory sandbox and will also observe the operations of interested trading platform operators and their compliance with proposed regulatory requirements in the sandbox environment.
At the end of this process, should the SFC determine that it is appropriate to regulate platform operators, it would then consider granting a licence and putting them under its close supervision. No licence will be granted should the SFC take the view that the risks involved cannot be sufficiently addressed.
The SFC said it is closely monitoring the development of virtual assets and may issue further guidance where appropriate. A 
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