The Securities and Futures Commission (SFC) has detailed the terms and conditions for crypto fund managers in a document published on its website on Friday called: “Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets” [or crypto assets].
Among the SFC’s stipulations, managers in Hong Kong should maintain liquid capital of at least HKD3m ($385,000), adopt sufficient risk management and compliance policies (including anti-money laundering procedures), implement security controls (including over its handling of blockchain forks), and appoint an independent custodian.
In addition, virtual asset fund managers must segregate its own assets from fund assets, and bank accounts should be established with an authorised financial institution in Hong Kong or a bank in a jurisdiction agreed to by the SFC, the document notes.
The publication comes 11 months after the SFC issued a statement on the regulatory framework for virtual asset portfolio managers, fund distributors and trading platform operators, where it defined virtual asset managers as licensed corporations with “a stated investment objective to invest in virtual assets; or an intention to invest 10% or more of the gross asset value of the portfolio in virtual assets”.
The SFC noted that volatility, liquidity, fraud and money laundering are among the “risks associated” with investing in crypto assets, and it highlighted limitations in Hong Kong’s regulatory regime.
While firms that distribute funds which invest in crypto assets had been required to be licensed by the SFC, specific controls on offering investment opportunities in crypto assets had only applied if the assets could be defined as “securities” or “futures contracts”.
The SFC said it had decided to bring “a significant portion of virtual asset portfolio management activities into its regulatory net”. Under the new regime, published late last week, firms managing funds which solely invest in crypto assets that do not constitute securities or futures contracts – but which distribute them in Hong Kong – will now be subject to a licensing regime.
In addition, firms in Hong Kong that were already licensed to manage portfolios including securities and/or futures contracts will also be subject to licensing conditions where they intend to invest 10% or more of the gross asset value of the portfolios under its management in virtual assets.
The SFC has also set several “principles-based” terms and conditions for licensees to meet. Importantly, fund managers can (generally) allow only “professional investors” to invest in crypto asset portfolios, while retail investors will only be able to invest in mixed portfolios that include crypto asset funds that make up less than 10% of the fund’s total assets.
