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This year has seen significant developments in Hong Kong as detailed regulatory guidance has been issued to enable institutions to navigate the evolving crypto-asset landscape. With increasing demand to provide virtual asset (VA)-related services and products, the guidance is a welcome step for the industry as it seeks to clarify what firms are able to do in this fast-changing area. In this article, we explore the detailed, and often complex, requirements on intermediaries and banks that wish to engage in VA-related activities.

The guidance comes in the form of a joint circular issued by the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA). It was issued to intermediaries (ie, licensed corporations and registered institutions), and provides updated guidance on VA-related activities. This will replace the SFC’s circular of 1 November 2018 on distribution of VA funds.

The joint circular deals with investor protection issues arising from:

  1. distribution of VA-related products;
  2. provision of VA dealing services; and
  3. provision of VA advisory services.

In addition, the HKMA has issued a separate circular to provide guidance to authorised institutions (AIs) on what they should pay attention to when dealing with matters relating to VAs and VA service providers.

The publication of this guidance follows a number of regulatory reforms in Hong Kong in the past few years relating to VAs. Herbert Smith Freehills has been following these developments closely and our earlier bulletins can be found here for reference:

  1. launch of the SFC’s regulatory framework for VA fund managers and VA fund distributors in November 2018 (now superseded) – see our bulletin here;
  2. publication of the SFC’s licensing conditions for VA fund managers in October 2019 – see our bulletin here;
  3. publication of the SFC’s position paper setting out a new regulatory framework for the licensing of centralised VA trading platforms in November 2019 – see our bulletin here;
  4. publication by the Financial Services and the Treasury Bureau of its consultation conclusions on a regulatory regime for VA service providers in May 2021 – see our bulletin here; and
  5. publication of the HKMA’s discussion paper on crypto-assets and stablecoins in January 2022 - see our bulletin here.

Key points to note

Joint SFC-HKMA circular to intermediaries

  • The joint circular covers a range of VA-related activities by intermediaries in light of the rapidly evolving developments in VA products and services. It sets out some new requirements (such as additional investor protection measures) and reminds intermediaries of the existing requirements that apply to the relevant activities. We highlight these in more detail below.
  • The joint circular no longer takes an overarching “professional investors (PIs) only” approach to VA activities. As discussed below, certain VA-related exchange-traded derivative products may be distributed to non-PIs, subject to complying with all relevant investor protection requirements.
  • Intermediaries that are already engaging in VA-related activities have a six-month transition period (ie, until 28 July 2022) to comply with the joint circular. They should make necessary adjustments to their policies, procedures, systems and controls to comply with the new requirements as well as ensure compliance with existing requirements.
  • Intermediaries that do not currently engage in VA-related activities must ensure that they are able to comply with the joint circular before introducing VA-related services. They are required to notify the SFC (and the HKMA, where applicable) in advance if they intend to engage in such activities (see SFC circular of 1 June 2018).

HKMA circular to AIs

The HKMA circular took effect on 28 January 2022. Before engaging in any VA-related activities, AIs should:

  • ensure that such activities will not breach any applicable laws and regulations in Hong Kong or any other relevant jurisdictions, seeking legal advice where necessary;
  • undertake risk assessments to identify and understand the associated risks; and
  • discuss with the HKMA (and other regulators where appropriate) and obtain the HKMA’s feedback on the adequacy of their risk-management controls before launching relevant products or services.

The HKMA circular also provides guidance on issues such as prudential risks, anti-money laundering, counter-terrorist financing and financial crime risk.

Further details on the HKMA circular to AIs are set out in our note here.

VAs and VA-related products

VAs refer to digital representations of value which may be in the form of digital tokens (such as utility tokens, stablecoins or security-backed or asset-backed tokens) or any other virtual commodities, crypto assets or other assets of essentially the same nature, irrespective of whether or not they amount to “securities” or “futures contracts” as defined under the Securities and Futures Ordinance (SFO), but excludes digital representations of fiat currencies issued by central banks.

For the purpose of the joint circular, VA-related products refer to investment products which:

  • have a principal investment objective or strategy to invest in VAs;
  • derive their value principally from the value and characteristics of VAs; or
  • track or replicate the investment results or returns which closely match or correspond to VAs.

Distribution of VA-related products

(A) Complex product regime requirements

Intermediaries distributing VA-related products considered to be complex products (except for the VA-related complex exchange-traded derivatives mentioned in paragraph 8 of the joint circular) should comply with the SFC’s requirements governing the sale of complex products, including ensuring the suitability of VA-related products, irrespective of whether or not there has been a solicitation or recommendation.

  • Appendix 3 to the joint circular contains a flowchart illustrating the factors for determining whether or not a VA-related product is a complex product.
  • The complex product regime requirements are set out in paragraph 5.5 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission and Chapter 6 of the Guidelines on Online Distribution and Advisory Platforms.
  • The VA-related exchange-traded derivatives mentioned in paragraph 8 of the joint circular (which are exempted from the complex product regime requirements) are those VA-related derivative products that are traded on regulated exchanges specified by the SFC and, in the case of exchange-traded VA derivative funds, are authorised or approved for offering to retail investors by the respective regulator in a designated jurisdiction listed in Appendix 2 to the joint circular.

(B) Additional investor protection measures

The SFC and the HKMA have imposed additional investor protection measures to cover the specific risks associated with VA-related products.

Firstly, VA-related products which are considered complex products (except those exchange-traded derivatives referred to in paragraph 8 of the joint circular, as discussed above) should only be offered to PIs.

Secondly, intermediaries should assess whether clients (except institutional PIs and qualified corporate PIs) have knowledge of investing in VAs or VA-related products, prior to effecting a transaction in VA-related products on their behalf.

  • Appendix 1 to the joint circular sets out non-exhaustive criteria for assessing whether a client can be regarded as having knowledge of VAs. For example, such knowledge will be considered to be present if the client has undergone training or attended courses, the client has current or previous work experience related to VAs or VA-related products, or the client has executed five or more transactions in any VA or VA-related product within the past three years.
  • If a client does not possess VA knowledge, the intermediary may only proceed if, by doing so, it would be acting in the client’s best interests and it has provided training to the client on the nature and risks of VAs.
  • Intermediaries should also ensure that their clients have sufficient net worth to be able to assume the risks and bear the potential losses of trading VA-related products.

(C) Other existing requirements to note

  • Selling restrictions – Intermediaries should observe the selling restrictions in Hong Kong and other jurisdictions which may be applicable to a particular VA-related product, for example, Part IV of the SFO which prohibits offering to the Hong Kong public investments that have not been authorised by the SFC. Depending on the selling restrictions specific to a particular jurisdiction, exchange or product, a VA-related product may or may not be offered to retail investors.
  • Online distribution – Where the VA-related products are distributed on an online platform, the platform must be properly designed and have appropriate access rights and controls to ensure compliance with selling restrictions.
  • Suitability obligations – Intermediaries should observe the suitability obligations (where applicable), such as ensuring that recommendations or solicitations made are suitable for clients in all circumstances, and conducting proper due diligence on the products (including understanding their risks and features, the targeted investors and the products’ regulatory status). Additional due diligence requirements for unauthorised VA funds are set out in Appendix 4 to the joint circular.
  • VA-related derivative products – Intermediaries assessing whether to provide clients with services for VA-related derivative products should assure themselves that the client understands the nature and risks of these products. Intermediaries should also provide clients with warning statements specific to VA futures contracts (can be a one-off disclosure). Examples of such statements are set out in Appendix 5 to the joint circular.
  • Financial accommodation – Intermediaries should be cautious in providing any financial accommodation to clients for investing in VA-related products. They should assess whether the client has the financial capacity to meet the obligations arising from leveraged or margin trading in VA-related products, including in a worst-case scenario. If not, it should not accept instructions from the client.
  • Information to clients – Intermediaries distributing VA-related products should provide information to clients in relation to such products and the underlying VA investments in a clear and easily comprehensible manner.
  • Warning statements – Intermediaries should provide clients with warning statements specific to VAs (can be a one-off disclosure). See examples of such statements in Appendix 5 to the joint circular.

Provision of VA dealing services

SFC-licensed trading platforms

  • Intermediaries should only partner with SFC-licensed VA trading platforms for the provision of VA dealing services, whether by way of introducing clients to the platforms for direct trading or establishing an omnibus account with the platforms.
  • Such services should only be provided to PIs.

Regulatory ambit

  • Intermediaries are expected to comply with all regulatory requirements imposed by the SFC and the HKMA when providing VA dealing services, irrespective of whether or not the VAs involved are securities.
  • Such services should only be provided to the intermediaries’ existing clients to which they provide services in Type 1 regulated activity (dealing in securities).

Intermediaries providing VA dealing services under an omnibus account arrangement

  • The expected conduct requirements will be imposed by the SFC (and in consultation with the HKMA, where applicable) as licensing/registration conditions (set out in Appendix 6 to the joint circular).
  • One of the licensing/registration conditions requires intermediaries to comply with prescribed terms and conditions (also set out in Appendix 6), which align with the requirements under the SFC’s framework for VA trading platforms to the extent that they relate to the performance of the dealing function carried out by intermediaries. Intermediaries should only permit clients to deposit or withdraw fiat currencies (and not VAs) from their accounts.

Intermediaries providing VA dealing services as an introducing agent

  • Such intermediaries should only introduce clients which are PIs to SFC-licensed platforms. They should not relay any orders on behalf of their clients to the platforms or hold any client assets (including fiat currencies and client VAs) for the introduction services.
  • These requirements will be imposed by the SFC (and in consultation with the HKMA, where applicable) as licensing/registration conditions (see Appendix 6 to joint circular).

VA discretionary account management services

  • Currently, licensed corporations providing services which meet the de minimis threshold (ie, a stated investment objective of a portfolio to invest in VAs or an intention to invest 10% or more of the gross asset value of a portfolio in VAs) are subject to additional requirements set out in the Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets (RA9 T&Cs) published in October 2019 (see our bulletin of October 2019).
  • Going forward, registered institutions wishing to provide such services should inform the SFC and the HKMA and will be required to comply with the RA9 T&Cs which will be imposed as registration conditions.
  • Where a Type 1 (dealing in securities) 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.

Provision of VA advisory services

Intermediaries are expected to comply with all regulatory requirements imposed by the SFC and the HKMA when providing advisory services, irrespective of the nature of the VAs. Such services should only be provided to intermediaries’ existing clients to which they provide services in Type 1 (dealing in securities) or Type 4 (advising on securities) regulated activities.

The expected conduct requirements are set out in the relevant prescribed terms and conditions (see Appendix 6 to the joint circular). This includes abiding by the suitability obligations, offering VA advisory services only to PIs, and assessing clients’ VA knowledge before providing such services.

Intermediaries should observe the same requirements highlighted above in relation to the distribution of VA-related products and must ensure the suitability of their recommendations to clients.



Hannah Cassidy photo

Hannah Cassidy

Partner, Head of Financial Services Regulatory, Asia, Hong Kong

Hannah Cassidy
Valerie Tao photo

Valerie Tao

Professional Support Lawyer, Hong Kong

Valerie Tao
Calvin To photo

Calvin To

Associate, Hong Kong

Calvin To

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Key contacts

Hannah Cassidy photo

Hannah Cassidy

Partner, Head of Financial Services Regulatory, Asia, Hong Kong

Hannah Cassidy
Valerie Tao photo

Valerie Tao

Professional Support Lawyer, Hong Kong

Valerie Tao
Calvin To photo

Calvin To

Associate, Hong Kong

Calvin To
Hannah Cassidy Valerie Tao Calvin To