Hong Kong Crypto Law – November 2018

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Regulation of Virtual Asset Portfolio Managers

Firms managing virtual asset portfolios, whether as licensed asset managers or as licensed securities dealers will be subject to additional licensing conditions. These apply to firstly to firms which are or are to be licensed as asset managers because they manage portfolios of traditional securities or futures contracts and which also manage or plan to manage portfolios investing solely or partially in virtual assets. This is subject to a de minimis provision although the Regulatory Framework Statement and the Regulatory Standards for Licensed Corporations Managing Virtual Asset Portfolios (Regulatory Standards) (at Appendix 2 of the Regulatory Framework Statement) are inconsistent as to how the de minimis provision will apply:

  • According to the Regulatory Framework Statement, a virtual asset portfolio manager will only be subject to the licensing conditions if it intends to invest 10% or more of the gross asset value (GAV) of the portfolios under its management in virtual assets (i.e. irrespective of the make-up of individual portfolios);
  • According to the Regulatory Standards, however, the licensing conditions will be imposed on licensed corporations which manage or plan to manage portfolios with:
    1. a stated investment objective to invest in virtual assets; or
    2. an intention to invest 10% or more of the GAV of the portfolio in virtual assets.

    This suggests that a single managed portfolio investing more than 10% of GAV in virtual assets would subject the portfolio manager to the additional licensing conditions, even if the portfolio manager’s investment in virtual assets amounts to less than 10% of the GAV of all portfolios under its management.

The new licensing conditions will also apply to firms which only manage funds which invest solely in non-SF virtual assets. These firms are not required to be licensed as asset managers (since the management of a fund which does not invest in securities or real estate is outside the definition of asset management). However, a firm that distributes such a fund in Hong Kong is required to be licensed as a securities dealer and the SFC will impose the new licensing conditions for virtual asset fund management on its securities dealer licence.

The licensing conditions will not however apply to:

  1. Licensed corporations which only manage funds investing in virtual asset funds (i.e. funds of funds); or
  2. Licensed corporations which manage portfolios whose mandate is to invest mainly in securities and/or futures contracts, where the investment in virtual assets exceeds 10% of NAV as a result of an increase in the prices of the virtual assets held in one or more of the portfolios. The licensed corporation is required to take all reasonable steps to reduce the portfolio’s investment in virtual assets below the 10% of GAV threshold. If, however, the position is expected to continue (i.e. virtual assets will continue to exceed 10% of GAV), the licensed corporation must alert the SFC which will consider imposing licensing conditions. Failure to notify the SFC may result in disciplinary action.

Bringing Virtual Asset Portfolio Managers within the Regulatory Net

All existing licensed corporations and licence applicants are required to notify the SFC if they currently manage or plan to manage one or more portfolios that invest in virtual assets, or intend to hold non-SF virtual assets on behalf of the portfolios under their management. The notification requirement applies even if: (a) the intention is to invest less than 10% of the portfolio’s GA in virtual assets; or (b) the virtual assets involved are “securities” or “futures contracts”. Failure to inform the SFC may constitute a breach of the Securities and Futures (Licensing and Registration) (Information) Rules.

The Licensing Process

On being informed that a firm is managing or plans to manage virtual asset portfolios, the SFC will send the standard licensing conditions to the firm and these may be varied following discussions with the firm according to its particular business model. Existing licensed corporations which do not agree to comply with the licensing conditions will be prohibited from managing virtual asset portfolios and must unwind their virtual asset positions.

A new licence applicant will have to agree to the licensing conditions proposed, or its licensing application will be rejected.