The Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) are responding to the changing landscape of virtual assets. The regulators have updated their policies with increasing inquiries from intermediaries about distributing crypto-related products and services.
From the reading of the latest circular, it appears that cryptocurrencies are "complex products" that should be available only to professional investors, while others should undergo appropriate training to trade them. However, the problem is that such products' definitions are quite vague.
SFC Changes Its Stance on Cryptos
In 2018, the SFC's initial approach towards virtual assets included restrictions aimed primarily at "professional investors." However, the rise of virtual assets in mainstream finance has prompted a review. The SFC now permits SFC-licensed virtual asset trading platforms to cater to retail investors and has greenlit virtual asset futures exchange-traded funds for public offering in Hong Kong.
The updated policy focuses on intermediaries wishing to engage in virtual asset activities, reflecting the latest market trends. This revised guideline will replace the joint circular from 28 January 2022 on the same subject.
Despite growing global interest in virtual assets, the regulatory landscape remains inconsistent. The SFC has identified risks, like potential market manipulation and lack of pricing transparency, which retail investors may not readily understand. Consequently, intermediaries must comply with SFC's requirements, especially when dealing with complex products.
Considering these risks, the SFC and the HKMA have proposed additional investor protection measures. These include selling restrictions, ensuring that only professional investors can access certain complex products, and a virtual asset-knowledge test for clients.
In practice, at least a few issues arise.
Mixed Signal from SFC and HKMA
The regulatory explanation of what constitutes "complexity" is rather ambiguous. For example, the authors suggest that a foreign VA non-derivative ETF would most likely be categorized as a complex product, suitable only for professional investors. Conversely, certain VA derivatives listed on approved exchanges could still be made available to the general public.
The guidelines also introduce fresh regulations for asset management firms dealing in crypto assets and cryptocurrency consultants. The Hong Kong authorities appear to be sending conflicting messages. For example, advisors must assess an asset's liquidity and presence on multiple indices before recommending it.
This could also have implications for the crypto marketing sector, as the guidelines don't explicitly address advertising standards for cryptocurrencies.
