Hong Kong Virtual Assets Regulatory Update: Joint Circular on Intermediaries’ Virtual Asset-Related Activities

  • 03 January 2024 03 January 2024
  • Corporate

On 20 October 2023, the Securities and Futures Commission (“SFC”) and the Hong Kong Monetary Authority (“HKMA”) released the Joint Circular on Intermediaries’ Virtual Asset-Related Activities (the “Circular”) to provide clarified guidance to intermediaries carrying on virtual asset-related activities.

This Circular supersedes the 28 January 2022 joint circular on intermediaries’ virtual asset-related activities.

In June 2023, the SFC introduced a new regulatory regime for Virtual Asset Trading Platform (“VATP”) Operators by amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“AMLO”). Under this regime, licensed VATPs can provide services to retail investors provided that robust investor protection measures are in place. See our previous article on this here.

In light of this, the SFC and HKMA have reviewed their existing policy for intermediaries wishing to engage in virtual asset-related activities (“VA-related activities”) and responded to industry enquiries on the further expansion of retail access through intermediaries.

The Circular covers:

  1. Distribution of VA-related products[1],
  2. Provision of virtual asset services,
  3. Provision of asset management services in respect of virtual assets, and
  4. Provision of virtual asset advisory services.

1. Distribution of VA-related products

Intermediaries distributing VA-related products that are considered complex products should comply with the SFC’s requirements on sale of complex products[2], such as ensuring the suitability of VA-related products.

In addition to the complex product regime, the SFC and HKMA imposed additional investor protection measures to cover specific risks associated with distribution of VA-related products:

Additional investor protection measures

Selling restrictions – Only a narrow range of VA-products can be offered to retail investors. This includes VA-related derivative products that are traded on regulated exchanges specified by the SFC, and exchange-traded VA derivative funds approved for offering to retail investors by the respective regulator in a designated jurisdiction. Other VA-related products that are considered complex products should only be offered to professional investors (“PIs”).

Virtual asset-knowledge test – Intermediaries should assess whether clients have adequate knowledge of investing in VAs or VA-related products before entering a transaction. If not, intermediaries should provide clients with adequate training on the nature and risks of virtual assets before proceeding.

Sufficient net worth – Intermediaries should ensure their clients have sufficient net worth to assume the risks and bear the potential losses of trading VA-related products.

Existing investor protection measures

Intermediaries should comply with existing investor protection measures, such as the prohibition to offer the Hong Kong public any unauthorised investments, and to consider other selling restrictions specific to other jurisdictions, exchanges or products. Intermediaries should provide disclosure and warning statements[3] and ensure their recommendations are suitable for clients.

2. Provision of Virtual Asset Dealing Services (VA Dealing Services)

Only partner with SFC-licensed VATPs Intermediaries can only partner with SFC-licensed VA trading platforms (“SFC-licensed platforms”) when providing VA dealing services.

Comply with all the regulatory requirements imposed The SFC and HKMA are only prepared to allow intermediaries licensed or registered for Type 1 (dealing in securities) regulated activity to provide VA dealing services. Intermediaries should comply with all the regulatory requirements when providing such services.

Comply with Prescribed Terms and Conditions Intermediaries providing VA dealing services under an omnibus account arrangement are expected to comply with the prescribed terms and conditions set out in Appendix 6 to the Circular.

Below are some of the terms and conditions the SFC and HKMA newly highlighted in this Circular:

  • Before providing VA dealing services to retail clients, intermediaries should:
    • Assess their knowledge of VA and risk tolerance level;
    • Set a limit to ensure their exposure to VA is reasonable;
    • Conduct VA dealing activities through an omnibus account established and maintained with an SFC-licensed platform which is not subject to the licensing condition that it can only serve PIs; and
    • Implement adequate controls to ensure retail investors can only trade in those VAs made available by the SFC-licensed platform for trading by retail investors.
  • Intermediaries which allow clients to deposit or withdraw VAs from their accounts, should only receive or withdraw such client VAs through segregated accounts established and maintained with:
    • Their partnered SFC-licensed platforms; or
    • Authorised financial institutions (or subsidiaries of locally incorporated authorized financial institutions) which meet the expected standards of virtual asset custody issued by the HKMA from time to time.

Comply with Requirements of Intermediaries as Introducing Agent – Type 1 intermediaries providing VA dealing services as an introducing agent should not relay any orders on behalf of their clients to SFC-licensed platforms or hold any client assets (such as fiat currencies and VAs) for the introduction services. The past circular provided that they could only introduce clients which are professional investors to SFC-licensed platforms, whereas the new circular no longer has this restriction.

3. Provision of Asset Management Services in respect of Virtual Assets

Intermediaries licensed or registered for Type 9 regulated activity performing VA-related asset management activities which meet the de minimis threshold of 10% are subject to additional requirements set out in the Proforma terms and conditions for licensed corporations or registered institutions which manage portfolios that invest in virtual assets.

If a Type 1 intermediary is authorised by its clients to provide VA dealing services on a discretionary basis as an ancillary service, the intermediary should only invest less than 10% of the gross asset value of the client’s portfolio in VAs. This was newly added in this Circular.

4. Provision of Virtual Asset Advisory Services

Intermediaries must be licensed and registered for dealing in or advising on securities (under Type 1 or Type 4 regulated activity). Intermediaries must comply with all the regulatory requirements imposed by the SFC and the HKMA when providing VA advisory services, irrespective of the nature of the virtual assets.

Intermediaries providing VA advisory services should:

  • Comply with prescribed terms and conditions under Appendix 6;
  • Observe suitability obligations;
  • Take all reasonable steps to ensure the VA recommended is:
    • Of high liquidity [4]; and
    • Is made available by SFC-licensed platforms for trading by retail investors.

Previously, provision of VA advisory services was only exclusive to professional investors, but this requirement is now removed.

Intermediaries engaged in tokenised securities-related activities

Intermediaries engaged in tokenised securities-related activities should comply with the existing requirements in respect of their activities and the expected standards of conduct and guidance on tokenised securities issued by the SFC from time to time. The SFC has recently released new circulars on tokenised securities-related activities, which should be reviewed and taken into account.

Timeline of Implementation

If already providing VA dealing services - If intermediaries wish to continue providing VA dealing services to non-qualified corporate PIs and individual PIs, they should revise their systems and controls to align with the updated requirements.

There is a 3-month transition period for intermediaries serving clients before this Circular’s full implementation.

If planning to provide VA dealing services - Those who plan to engage in such VA dealing services, they should ensure they comply with the requirements of this Circular before introducing the services.

Notification - Intermediaries should notify the SFC (and the HKMA, where applicable) in advance if they intend to engage in any activities involving tokenised securities and virtual assets, or if they intend to make any changes to these activities conducted (including change in type of clientele).

This Circular’s focus is to provide practical guidelines on how intermediaries should carry on with their VA-related activities, covering distribution, dealing, advisory and asset management.

We will continue to monitor the developments in the virtual assets regulatory and FinTech space. For advice on compliance-related issues, please contact Joyce Chan or your usual Clyde & Co contact.

[1] “VA-related products” refers to investment products which: (a) have a principal investment objective or strategy to invest in virtual assets; (b) derive their value principally from the value and characteristics of virtual assets; or (c) track or replicate the investment results or returns which closely match or correspond to virtual assets.

[3] Please see Appendix 5 of a non-exhaustive list of risk disclosure statements. 

[4] In assessing the liquidity of a specific virtual asset for trading by retail clients, intermediaries should, at a minimum, ensure that the virtual asset is an eligible large-cap virtual asset, ie, it should have been included in a minimum of two acceptable indices issued by at least two different index providers.


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