What is the future of virtual assets under the SFC’s recent regulation statement?
Recently, the Securities and Futures Commission (‘SFC’) has revealed its intention to provide clear guidelines on virtual assets for the industry. Yesterday, ‘’Statement on regulatory framework for virtual asset portfolios managers, fund distributors and trading platform operators ‘’ (statement) provoked the shock in the industry. We have invited Mr. Wong, the founding president of the Hong Kong Blockchain Industry Association, to analyze the impact of the statement to the industry.
Recently, the Securities and Futures Commission (‘SFC’) has revealed its intention to provide clear guidelines on virtual assets for the industry, and announced the ‘’Statement on regulatory framework for virtual asset portfolios managers, fund distributors and trading platform operators ‘’, which has provoked shock in the industry.
Before the announcement of the statement, apart from security-defined cryptocurrency transactions, like cryptocurrency futures that are under the SFC supervision, Hong Kong has never set up regulations for virtual assets. Under current situation that virtual assets are issued heavily, regulatory authority realized that some consultants, who assist in designing cryptocurrencies, intentionally transform their products to payment tools or functional tokens etc., with the purpose of escaping from regulations and avoiding the supervision of the SFC.
In addition to that, many cryptocurrency exchanges are not established in Hong Kong, yet the currencies are transacted here. Before the announcement of the statement, as cryptocurrency transactions were not regulated by the SFC, people worried that the supervision system will have a loophole regarding this.
Right before the issuance of the statement, Miss Leung, the Deputy Chief Executive of the SFC, said publicly that many private fund managers and intermediaries who engage in cryptocurrency transactions had enquired the SFC about the licensing of their activities. Therefore, from the perspective of the SFC, issuing this statement can provide clear guidance for the stakeholders in the industry.
In the past, Hong Kong regulatory authorities have defined virtual assets as goods. The Hong Kong Monetary Authority (‘HKMA’) thought that virtual assets, like Bitcoin and Ethereum, had very similar characteristics with commodity goods and therefore were not under its supervision. Under the fact that cryptocurrency is neither a security nor a future contract, it is not regulated by the SFC as well.Yet, after the issuance of the statement, individuals and institutions that involved in virtual assets will be regulated by the supervising policy in three aspects.
Analysis 1: Distribution and Management must hold Type 1 and 9 License respectively
According to the instructions of the SFC, if over 10% of the total assets under management of a fund are invested in virtual assets, the fund manager must hold the Type 9 License (Asset Management) and fulfill the code of conduct for licensee. The SFC requires all distributors of funds which invest in virtual assets, regardless of their ratio in the total assets, to get the Type 1 License (Dealing in Securities) from the SFC. Thus, funds that manage over 10% of virtual assets in their portfolio or distribute virtual assets will be regulated by the SFC.
According to the guidelines of the SFC, if funds plan to manage investment portfolios related to virtual assets, no matter they are newly applying for the license or currently managing these assets, they must inform the SFC for the related activities. The SFC will base on the ability and business of the company to recommend for the specific licensing conditions. If the fund manager disagrees with the conditions, the licensing request will be rejected and the owned virtual assets have to be liquidated in a reasonable period of time.
To the industry, the new instructions of the SFC are undoubtedly the important milestone for licensing and regulating activities related to virtual assets investment. Virtual assets are operated with the decentralized blockchain technique. They can be transferred around the world under different jurisdictions. Appropriate instructions, licensing process and regulations can allow quality practitioners in Hong Kong to engage in virtual asset activities safely.
Analysis 2: Potential regulating directions
To practitioners engaging in virtual asset activities, the instructions are good indication for the recognition of virtual assets. Regulations can encourage more institutions and individuals to step into the virtual asset industry. The earlier the setup of regulating framework, the earlier Hong Kong can establish its status of international regulating indicator.
Many trading platforms of virtual assets use mathematical models and programming to provide liquidity, dark pool operations and maintenance of market value. As these are similar to the activities that are regulated by the SFC through Type 7 License (Providing Automated Trading Services), whether these trading platforms need to inform and fulfill the requirements of the SFC is much concerned.
Apart from that, some virtual assets also possess the function of fundraising, whether consultants who assist in designing those virtual assets need to be regulated as well is also a concern for industry practitioners. In the future, will those consultants integrate with the coinless blockchain industry?