Recently, the Hong Kong Securities and Futures Commission (SFC) issued a notice requiring specific requirements for management companies, investment strategies, and product custody institutions with virtual assets accounting for more than 10% of public fund products. Concurrently, the SFC and the Hong Kong Monetary Authority jointly released a notice regarding intermediaries engaging in activities related to virtual assets, indicating their readiness to accept applications for the recognition of virtual asset funds, including spot ETFs. This suggests that since the appearance of the first batch of virtual asset futures ETFs in Hong Kong in December 2022, Hong Kong may be advancing towards the development of virtual asset spot ETFs.
According to the current regulations, fund companies holding the SFC Type 9 license must not exceed a 10% allocation of virtual assets in their fund portfolios. The latest notice explicitly states that for products with virtual asset allocations exceeding or expected to exceed 10%, management companies must apply for and obtain approval from the SFC before selling to Hong Kong investors.
The SFC has put forth specific requirements in a document titled "SFC-Recognized Funds Investing in Virtual Assets." Firstly, companies managing virtual asset funds (funds with an allocation exceeding 10%) must have a good compliance record, and at least one employee should have experience in managing virtual assets or related products. Management companies must also meet the existing or additional requirements imposed by regulatory authorities on virtual asset management companies.
Regarding investment targets, virtual asset funds can only invest in virtual assets traded on licensed virtual asset trading platforms in Hong Kong. If investing in futures, they must invest in futures contracts traded on exchanges or trading platforms approved by the SFC.
In terms of investment strategy, SFC-recognized virtual asset funds can directly or indirectly invest in virtual asset tokens (tokens). If investing in futures, they should be futures contracts traded on traditional regulated futures exchanges. Additionally, companies managing virtual asset funds must ensure that the liquidity of invested futures is sufficient, and the roll cost of futures is controllable. The SFC explicitly states that leverage on virtual assets at the fund level is not allowed. If the fund primarily invests in futures-related strategies, it should adopt an active investment strategy and have flexibility in portfolio construction.
Regarding custody institutions, SFC-recognized virtual asset funds must utilize virtual asset platforms or financial institutions approved by the SFC for virtual asset custody. These custody institutions must meet the requirements of the Hong Kong Monetary Authority for custodian institutions. Custody institutions must also ensure that the custody of virtual asset holdings is segregated from their own or assets held for other clients, and the majority of virtual assets are stored in cold wallets. Additionally, custody institutions must ensure that the "seed phrase" and private keys of virtual assets are stored in Hong Kong and subject to a defined scope of information protection.
In summary, Hong Kong, as one of the few jurisdictions globally with a regulatory framework for virtual assets, has attracted attention from virtual asset practitioners worldwide. With the continuous improvement of relevant policies and strengthened regulation, Hong Kong's virtual asset market is poised for more standardized and healthy development.
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