February 8, 2022
In a further step towards the regulation of virtual assets (including digital tokens, stablecoins, and other crypto assets, “VAs”) in Hong Kong, on 28 January 2022, the Securities and Futures Commission (“SFC”) and the Hong Kong Monetary Authority (“HKMA”, collectively the “Regulators”) published a joint circular (the “Joint Circular”) and appendix document (the “Appendix”) on intermediaries’ VA-related activities. “VA-related activities” covers:
On the same day, the HKMA published a further circular (the “HKMA Circular”) to provide regulatory guidance to authorised institutions (“AIs”) when dealing with VAs and virtual asset service providers.
This client alert provides an overview of the key requirements set out in these two circulars and our views on the regulatory direction of travel in Hong Kong.
I. Scope of the Joint Circular and the HKMA Circular
The Joint Circular refers to “intermediaries”, which covers corporations licensed by the SFC to carry on regulated activities and AIs registered with the SFC. The HKMA Circular only applies to AIs. Therefore companies engaged in VA-related activities that are neither intermediaries nor AIs (i.e. “Unregulated VASPs”) are not directly subject to the requirements and guidance set out in these circulars.
However, these two circulars will significantly affect intermediaries and AIs’ ability to deal with Unregulated VASPs, including for their customers. For example, pursuant to the regulatory guidance in the HKMA Circular, AIs may implement systems and controls that could potentially restrict their customers from engaging in certain VA-related activities through their Hong Kong bank accounts. Furthermore, such Unregulated VASPs must ensure that their business activities do not require license, registration and/or authorisation, or else they could be found to be in breach of the Securities and Futures Ordinance (Cap. 571) (“SFO”) and other laws, and be subject to enforcement action by the Regulators.
II. Distribution of VA-related products
“VA-related products” refers to investment products which:
According to the Joint Circular, VA-related products are very likely to be considered “complex products” because, in the Regulators’ view, the risks of investing in VAs are not reasonably likely to be understood by a retail investor.
As such, the SFC’s investor protection measures for the sale of complex products apply when intermediaries distribute VA-related products. This means that intermediaries must ensure the suitability of transactions in VA-related products, even where there has been no solicitation or recommendation (i.e. execution-only transactions). The regulators also considered it necessary to set out additional investor protection measures for the distribution of VA-related products.
In summary, intermediaries distributing VA-related products must observe the following existing and new requirements:
Note that, while not expressly stated in the Joint Circular, some of the requirements above (e.g. suitability) should not be applicable when intermediaries deal with institutional professional investors and qualified corporate professional investors, which aligns with the regulatory expectations for traditional securities products.
While the Joint Circular prescribes limited exemptions to the above requirements for VA-related derivative products traded on regulated exchanges specified by the SFC, and to exchange-traded VA derivative funds authorised or approved for offering to retail investors by a regulator in a designated jurisdiction specified by the SFC. However, at this time, this exemption will apply to a very small number of VA-related products because many VA-related derivative products are currently traded on unregulated VA trading platforms.
Finally, although not a new requirement, the Joint Circular reminds intermediaries to observe the provisions in Part IV of the SFO which prohibits the offering to the Hong Kong public of investments which have not been authorised by the SFC. Intermediaries are also reminded to strictly adhere to the Hong Kong selling restrictions applicable to VA-related products.
III. Provision of VA-dealing services
According to the Joint Circular, the Regulators’ are concerned that the majority of VA trading platforms are either unregulated, or are regulated only for anti-money laundering and counter-financing of terrorism (“AML/CFT”) purposes. Therefore, these VA trading platforms may not be subject to regulatory standards comparable to the SFC’s own regulatory framework for VA trading platforms. As such, the Regulators will require licensed intermediaries that provide VA-dealing services to comply with the following requirements:
IV. Provision of VA-advisory services
According to the Joint Circular, the regulatory requirements for providing VA-advisory services can be summarised as follows:
V. Implementation of requirements in the Joint Circular
For intermediaries that already engage in VA-related activities, there will be a six-month transition period for intermediaries serving existing clients of its VA-related activities to revise their systems and controls to align with the updated requirements in the Joint Circular.
For intermediaries that do not currently engage in VA-related activities, they should ensure that they comply with the requirements in the Joint Circular before providing such services.
Intermediaries are required to notify the SFC (and the HKMA, where applicable) before they engage in VA-related activities.
VI. HKMA Circular
The HKMA Circular provides regulatory guidance for AIs when dealing with VAs and VASPs. The guidance can be summarised as follows:
The Joint Circular and the HKMA Circular reflect the SFC’s and the HKMA’s ongoing efforts to regulate the VA sector, particularly from the perspective of investor protection, mitigating AML/CFT risk, and addressing prudential risk in the case of AIs. This is reflected in both existing requirements (e.g. suitability obligations) and new requirements (e.g. VA-knowledge test). For intermediaries already providing or planning to provide VA-related services, there will likely need to be considerable changes to policies and procedures, and systems and controls, to ensure compliance with the latest regulatory requirements and guidance.
While the Joint Circular and the HKMA Circular are not directly applicable to Unregulated VASPs, it can be anticipated that these two circulars will have a commercial impact on these companies, as intermediaries and AIs are likely to implement systems and controls that limit their dealings with such companies (including on behalf of the customers of intermediaries and AIs). In the medium to long-term, these companies which operate VA trading platforms in or from Hong Kong, or provide services marketed to the Hong Kong public, will likely need to be licensed by the SFC under the virtual asset services providers regime and/or under a future regulatory regime to be supervised by the HKMA.
For further information on the future regulatory regimes, please refer to our earlier client alerts:
 SFC’s FAQ on Compliance with Suitability Obligations by Licensed or Registered Persons (last updated 23 December 2020) (the “Suitability FAQ”).
 “Institutional professional investors” is defined under paragraph 15.2 of the Code of Conduct for Persons Licensed by or Registered with the SFC (the Code of Conduct) as persons falling under paragraphs (a) to (i) of the definition of “professional investor” in section 1 of Part 1 of Schedule 1 to the SFO. “Qualified corporate professional investors” refers to corporate professional investors which have passed the assessment requirements under paragraph 15.3A and gone through the procedures under paragraph 15.3B of the Code of Conduct.
 This refers to the voluntary opt-in regime set out in the SFC’s Position Paper on Regulation of Virtual Asset Trading Platforms (6 November 2019).
 For completeness, according to the Joint Circular, for intermediaries licensed or registered for Type 1 regulated activity that are authorised by its clients to provide VA-dealing services on a discretionary basis as an ancillary service, these intermediaries should only invest less than 10% of gross asset value of its clients’ portfolio in VA.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you wish to discuss any of the matters set out above, please contact any member of Gibson Dunn’s Crypto Taskforce ([email protected]) or the Global Financial Regulatory team, including the following authors in Hong Kong:
William R. Hallatt (+852 2214 3836, [email protected])
Grace Chong (+65 6507 3608, [email protected])
Emily Rumble (+852 2214 3839, [email protected])
Arnold Pun (+852 2214 3838, [email protected])
Becky Chung (+852 2214 3837, [email protected])
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