As the SFC is concerned about the growing investor interest in cryptocurrencies and other virtual assets funds, where the significant risks are associated with, they are issuing guidance on the regulatory standards expected of virtual asset portfolio managers and fund distributors. This initiative shows the Hong Kong Watchdog’s effort in exploring a conceptual framework for the potential regulation of cryptocurrency trading platform operators.
According to the statement, the regulatory guidance has been divided into two parts: one is targeting the virtual asset portfolio managers and fund distributors, the other is mainly for the crypto trading platform operators.
The regulatory approach for virtual asset portfolio managers indicated that those firms presently managing portfolios that invest in virtual assets, are required to inform the SFC. If the firm appears to be capable of meeting the expected regulatory standards, the proposed Terms and Conditions will be provided to the firm.
After the license applicant or licensed corporation of the firm has agreed with the proposed Terms and Conditions, they will be imposed as licensing conditions.
In addition, funds that invest more than 10 per cent of the gross asset value (GAV) in virtual currencies will need to be licensed by the SFC. Henceforward, the private equity funds would no longer operate unregulated in Hong Kong.
To the crypto exchange operators, the SFC will propose them a regulatory regime known as a “sandbox”. In the initial exploratory stage, the SFC would not grant a license to platform operators but the crypto exchanges will still be able to trade while negotiating with the SFC on the expected regulatory standards. Meanwhile, the SFC will observe the live operations of the crypto exchanges in light of these standards.
The SFC would consider whether the virtual asset trading platforms are appropriate to be regulated by them in light of the performance of these trading platforms in the Sandbox.
If the SFC grants a license to a qualified platform operator, it will impose appropriate licensing conditions and the operator will proceed to the next stage of the Sandbox.
Gary Cheung, chairman of Hong Kong Securities Association commented that:
“It will boost investor protection and hence attract more mainlanders to trade cryptocurrency assets in Hong Kong and help Hong Kong to be among the top cryptocurrency trading centres worldwide because proper regulation is very important for attracting the big players.”