Hong Kong Regulator Publishes New Rules for Crypto Fund Managers

The SFC's new rules include guidelines on asset custodianship, segregation, and participation in ICOs.

Hong Kong’ Securities and Futures Commission (the regulating body analogous to the United States’ Securities and Exchange Commission) has published a new set of rules for fund managers that control cryptocurrency assets. The new set of rules comes at a time of political turmoil and higher-than-ever Bitcoin trading volumes.

The rules, which are outlined in a 37-page document, include guidelines on how funds should be structured, risk management, custodianship, record-keeping, asset segregation, and other important legal and logistical matters.

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Emphasis on appropriate custodianship

The rules also included certain financial requirements, including the stipulation that “If the Virtual Asset Fund Manager holds Virtual Assets on behalf of the funds it manages, the Virtual Asset Fund Manager shall at all times maintain liquid capital which is not less than an amount equal to the higher of (a) HK$ 3 million and (b) its variable required liquid capital.”

In other words, virtual asset fund managers must keep roughly $383,000 in liquid capital available at all times.

Additionally, virtual asset fund managers are now required to appoint a “functionally independent” custodian.

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This could either be a third party, or “where self-custody is adopted, the Virtual Asset Fund Manager should ensure that it has effective policies, procedures, and internal controls in place to protect the Virtual
Assets…for example, the persons fulfilling the custodial function are independent from the persons fulfilling the fund’s management functions.”

The document also mandates that fund managers take pains to ensure that assets are properly segregated. For example, if a Virtual Asset Fund Manager receives client deposits in fiat currency, it should “establish one or more segregated bank accounts for holding the client money received by it”; the money is to be retained there until one of a set of other requirements is met.

Rules on participating in ICOs

The new rules also lay out a set of guidelines for virtual asset fund managers thinking of participating in a so-called “Initial Offering,” the document’s term for tokenized fundraising events.

The document explains that “where a Virtual Asset Fund Manager participates in an initial offering of Virtual Assets on behalf of funds managed by it, it should ensure that the tokens purchased in the sale are fairly allocated and that “records of (i) the intended basis of allocation before a transaction is effected; (ii) the actual allocation after the transaction is effected; and (iii) the reasons for the differences between the intended and actual allocations, are made.”

Bitcoin trading has spiked due to political turmoil

Bitcoin trading on cryptocurrency exchange LocalBitcoins has ballooned in Hong Kong as citizens of the independent city are unable to withdraw cash out of ATMs. Indeed, Hong Kong residents are fearful that the Chinese government may start monitoring digital payments and freezing assets.

This is not the first time that citizens of a country in crisis have turned to cryptocurrency as a way to protect the value of their savings and survive. A number of reports have claimed that Venezuelan citizens are using Bitcoin as a method of financial survival that has emerged over the last two years.

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