Hong Kong’s New Position on Spot-Crypto and ETF Investing Comes With a Catch

Hong Kong financial authorities have revised their previous directives, which restricted the sale of spot products exclusively to professional investors. The updated memo now permits intermediaries to provide services to a broader spectrum of clients.

Hong Kong Updates Its Policy

In a circular released on October 20, the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) acknowledged that there has been an increase in inquiries from intermediaries.

This is regarding the distribution of products related to virtual assets (VA-related products) to investors.

"Hong Kong's financial regulators open doors for broader access to spot crypto and ETF investing, offering new opportunities for investors. Stay informed with the latest insights on blockchain income at the BIR: link inserted"

— The BIR (@blockchaininrep) October 23, 2023

As a response to this growing interest, Hong Kong’s financial authorities have revised their stance on spot-crypto and ETF (Exchange-Traded Fund) investments, expanding access beyond professional investors alone.

This policy adjustment takes into consideration the latest market developments and the increasing industry demand to broaden retail access through intermediaries.

It also aims to enable investors to directly deposit and withdraw virtual assets with intermediaries while ensuring appropriate safeguards are in place.

When the SFC established its regulatory approach for virtual assets in 2018, it primarily restricted various activities, including distributing virtual asset funds (VA funds), to “professional investors only.”

Since then, the virtual asset landscape has rapidly evolved, entering the realm of mainstream finance.

This evolution has brought about a broader array of investment products, catering to retail and professional investors seeking exposure to virtual assets.

In particular, the SFC has granted retail access through SFC-licensed virtual asset trading platforms (VA trading platforms).

In addition, it has authorized the public offering of virtual asset futures ETFs in Hong Kong.

However, this decision to reverse its stance regarding intermediaries engaged in virtual asset-related activities opens up opportunities for Hong Kong to become a regional hub for crypto innovation and investments.

Hong Kong Revised Policy Comes With a Catch

The reversal of Hong Kong’s stance on cryptocurrencies comes with a notable catch. The government has decided to impose strict regulations and oversight on these investments to mitigate potential risks.

This approach reflects a delicate balance between embracing the innovation of cryptocurrencies and protecting investors from potential pitfalls.

The regulatory bodies noted that while virtual assets are gaining popularity in various regions, the global regulatory environment remains inconsistent.

In addition, the risks associated with investing in virtual assets, as initially outlined by the SFC in 2018, persist.

For instance, service providers in the virtual asset sector, like custodians and trading platforms, often operate with minimal regulation, primarily adhering to anti-money laundering and counter-financing of terrorism rules.

This lack of comprehensive oversight exposes virtual asset markets to additional counterparty risks.

Moreover, both the SFC and the HKMA are apprehensive that many overseas virtual asset trading platforms may not adhere to regulatory standards comparable to those outlined in the SFC’s regulatory framework for such platforms.

Consequently, the protections afforded to investors on these platforms may be insufficient.

In response to these concerns, the financial regulatory authorities now mandate intermediaries to collaborate with SFC-licensed virtual asset trading platforms exclusively. This measure is vital to enhance investor protection when offering virtual asset dealing services.

In addition, this requirement applies whether intermediaries are introducing clients to these platforms for direct trading or establishing omnibus accounts with the platforms.

Aside from that, the circular noted that intermediaries must evaluate whether their clients possess prior knowledge about investing in virtual assets or products related to virtual assets.

This evaluation is necessary before facilitating any transactions on their behalf, except for institutional professional investors and qualified corporate professional investors.

In cases where clients lack this understanding, intermediaries can only proceed if they have sufficiently educated the client about the characteristics and associated risks of virtual assets.

Additionally, intermediaries must verify that their clients have an adequate net worth to manage the risks and potential losses of trading VA-related products.