This move comes as a response to the growing interest and inquiries from intermediaries about distributing investment products linked to virtual assets and offering VA dealing services.
The regulatory landscape, initially crafted in 2018 with a focus on professional investors, has undergone significant changes to align with the rapid advancements and broader inclusion of virtual assets in mainstream finance.
<h2 id="hk-s-sfc-ready-for-virtual-asset-spot-etfs">HK's SFC ready for virtual asset spot ETFs</h2>
The regulatory update is particularly notable for its authorization of virtual asset futures exchange-traded funds (VA futures ETFs) for public offerings in Hong Kong. Additionally, the SFC has shown openness to applications for other virtual asset funds, including virtual asset spot exchange-traded funds (VA spot ETFs). This marks a significant shift, expanding the scope of VA-related activities to a wider range of investment products, thereby accommodating both retail and professional investors.
The <a href="https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=23EC67" rel="noopener noreferrer nofollow">circular</a> carefully outlines the updated requirements applicable to intermediaries when distributing VA-related products. It also sets clear standards of conduct expected from these intermediaries, especially when they are dealing with SFC-authorized VA funds. This includes specifying the obligations and due diligence required in the distribution of these products, ensuring the intermediaries understand the inherent risks and regulatory nuances associated with virtual assets.
The distribution of investment products with exposure to virtual assets is particularly critical in this update. The circular acknowledges the uneven global regulatory landscape for virtual assets and reiterates the risks identified back in 2018. It highlights that the service providers in the VA industry, such as custodians and VA trading platforms, may not be regulated to the extent of traditional financial market players, posing additional risks. Consequently, most VA-related products are likely considered complex, and the circular outlines strict compliance requirements for intermediaries who distribute these products.
A key aspect of the circular is its focus on investor protection. It imposes additional measures for the distribution of VA-related products to safeguard investors against specific risks associated with these products. For instance, certain selling restrictions are advised, and a virtual asset-knowledge test is proposed to assess clients' understanding of VAs before any transaction. This approach ensures that only clients with adequate knowledge and financial capacity are engaged in VA-related transactions.
The circular also addresses the provision of VA dealing services, emphasizing the need for adequate investor protection. Concerns are raised about many overseas VA trading platforms not being subject to regulatory standards comparable to those under the SFC’s framework. To mitigate risks, the circular proposes that intermediaries partner only with SFC-licensed VA trading platforms for providing VA dealing services. This includes introducing clients to these platforms for direct trading or establishing omnibus accounts.
For asset management services in respect of virtual assets, the circular sets additional requirements for virtual asset portfolio managers and discretionary account management services. These requirements align with the proactive approach towards managing the risks associated with virtual asset investments.
The circular also touches upon the provision of virtual asset advisory services. It outlines the expected conduct requirements for these services, ensuring intermediaries comply with all regulatory requirements when providing advisory services in virtual assets, regardless of their nature.
Lastly, the circular provides a clear implementation roadmap. Intermediaries currently providing VA dealing services are expected to revise their systems and controls to align with the updated requirements. A transition period is provided for intermediaries to adapt to these new standards, highlighting the SFC and HKMA’s commitment to a smooth regulatory transition in the dynamic VA landscape.
<h2 id="specific-requirements-for-sfc-authorised-funds-that-invest-in-vas">Specific requirements for SFC-authorised funds that invest in VAs</h2>
Additionally, the <a href="https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=23EC65" rel="noopener noreferrer nofollow">SFC issued a new circular</a> regarding the authorization of investment funds with significant exposure to virtual assets (VAs) for public offerings in Hong Kong. This circular updates and supersedes the previous guidelines issued on 31 October 2022, reflecting the rapidly evolving landscape of virtual assets and their increasing popularity among both retail and professional investors in Hong Kong and globally.
A notable development was the acceptance of exchange-traded funds (ETFs) applications that gain exposure to VAs primarily through futures contracts since October 2022. Additionally, the licensing regime for virtual asset trading platforms (VATPs) became operational in June 2023, further facilitating access to large-cap spot VAs for Hong Kong investors.
The new circular outlines specific requirements for SFC-authorised funds that invest in VAs. These funds must adhere to the overarching principles and regulations in the SFC Handbook, including the Code on Unit Trusts and Mutual Funds (UT Code). Moreover, management companies of these funds are expected to demonstrate a strong track record of regulatory compliance and employ at least one competent staff member with relevant experience in managing VA or related products.
Investments by SFC-authorised VA Funds should be limited to virtual asset tokens that are accessible for trading on SFC-licensed VATPs to the Hong Kong public. Direct or indirect investments in eligible VA tokens are permitted under specific conditions. For example, VA futures must be traded on regulated futures exchanges with adequate liquidity, and the management of roll costs must be demonstrably manageable.
In terms of custody, the trustee or custodian of an SFC-authorised VA Fund must either delegate its VA custody function to an SFC-licensed VATP or an authorised financial institution (AI) that meets the Hong Kong Monetary Authority’s (HKMA) standards for VA custody. They must ensure that VA holdings are segregated from their own and other clients' assets, with most holdings stored in cold wallets to minimize risks.
The valuation of spot VAs in these funds should be based on an indexing approach using trade volume data from major VA trading platforms. This approach aims to ensure a fair and accurate representation of the VA market value.
The circular also emphasizes the importance of clear disclosure and investor education, especially regarding the investment limits and risks associated with VA exposure. Additionally, all necessary service providers, such as fund administrators, participating dealers, market makers, and index providers, must be competent and ready to support the SFC-authorised VA Funds.
For distribution of these funds, the circular refers to the requirements outlined in the joint circular on intermediaries’ virtual asset-related activities. Moreover, the SFC reserves the right to introduce additional requirements or conditions as necessary.
Finally, the circular clarifies that these requirements do not apply to Recognised Jurisdiction Schemes, including UCITS funds, except for the prior consultation and approval requirement. Funds intending to have VA exposure of more than 10% of their net asset value must consult with and obtain approval from the SFC.
This circular marks a significant step in regulating virtual asset investments in Hong Kong, balancing the need for innovation with the imperative of investor protection. The SFC's approach reflects a careful consideration of the unique challenges and opportunities presented by virtual assets in the contemporary financial landscape.

Hong Kong authorizes crypto spot ETFs

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