On January 28, 2022, the Hong Kong Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) issued a common circular on the activities related to the virtual assets of intermediaries (Joint Circular), which replaces the Circular of the SFC to intermediaries relating to the distribution of funds of virtual assets of November 1, 2018 (Flyer 2018).
The joint circular mainly covers the following activities relating to products related to virtual assets (AV related products) and services: (a) distribution of AV-related products; (b) provision of virtual asset trading services (VA Trading Services); and (c) provision of virtual asset advisory services (AV consulting services). The Joint Circular defines “AV-related products” as products that (a) have a primary investment objective or strategy of investing in virtual assets; (b) derive their value primarily from the value and characteristics of the virtual assets; or (c) track or replicate investment results or returns that match or closely match the Virtual Assets.
A. Distribution of AV-related products
The following requirements apply to the distribution of AV-related products:
- Complex product requirements – AV-related products are very likely to be considered complex products and therefore the usual requirements for distribution of complex products (e.g. ensuring suitability, minimum information and disclaimers) will apply.
- “Professional investors” only – With the exception of a limited range of products (for example, AV-related derivatives which are traded on regulated exchanges specified by the SFC, or exchange-traded AV-derivative funds whose offer to retail investors is authorized or approved by the respective regulator in a designated country). jurisdiction), VA-related products that are considered complex products should only be offered to professional investors.
- Virtual Asset Knowledge Test – With the exception of Institutional Professional Investors and Qualified Professional Investors, intermediaries must (i) assess whether clients are aware of the investment in virtual assets or AV-related products before entering into a transaction on AV-related products on their behalf; and (ii) ensure that their clients have sufficient net worth to be able to bear the risks and bear the potential losses of trading AV-related products. The SFC has defined non-exhaustive criteria to assess whether a customer can be considered to have knowledge of virtual assets.
- Sales Restrictions and Suitability Obligations –Intermediaries are also required to comply with any other selling restrictions in Hong Kong and other jurisdictions that may apply to a particular VA-related product (e.g. prohibition on offering unauthorized investments in Hong Kong public) and adequacy obligations.
- Financial accommodation requirements – When providing clients with financial facilities to invest in VA-related products, an intermediary must be prudent and ensure that the client has the financial capacity to meet the obligations arising from leveraged trading or AV-related product margin, even in a worst-case scenario. In the absence of such assurance, the intermediary should not accept instructions from the client.
- Provide information in a clear and easily understandable way – Intermediaries should ensure that information about VA-related products and underlying investments in virtual assets is provided in a clear and easily understandable manner.
- Disclosure of Warnings – Intermediaries must provide warning statements (which may be a one-time disclosure) to clients specific to virtual assets. Warnings should include, but are not limited to and where applicable, general risks of trading futures, risks specific to virtual asset futures, the ongoing evolution of virtual assets and how this may be affected by global regulatory developments, price volatility and other applicable risks.
B. Provision of AV trading services
Intermediaries providing AV trading services are also required to comply with the following requirements:
- Professional investors only – AV trading services should only be provided to professional investors.
- SFC and HKMA requirements – Intermediaries are expected to comply with all regulatory requirements imposed by the SFC and HKMA when providing AV trading services, whether or not the virtual assets involved are securities.
- Partner with SFC licensed VA trading platform – In order to provide AV trading services, intermediaries are required to partner only with SFC-licensed AV trading platforms.
- Existing type 1 customers only – AV’s trading services can only be provided to existing clients of intermediaries to whom they provide type 1 regulated services (securities trading).
- License/Registration Terms and Conditions – The SFC (in consultation with the HKMA, as appropriate) will impose as license/registration conditions (Terms and conditions) expected conduct requirements for intermediaries to provide AV trading services under an omnibus account arrangement. Under the Terms and Conditions, intermediaries will be subject to various obligations, including only allowing customers to deposit or withdraw fiat currencies from their accounts, and not allowing the deposit or withdrawal of customers’ virtual assets in order to minimize the associated risks. to such a transfer.
- Virtual Assets Discretionary Account Management Services Terms and Conditions – With respect to discretionary virtual asset account management services, if a licensed company intends to invest 10% or more of the gross asset value of a portfolio in virtual assets, it will be subject to additional requirements as defined in the Proforma terms and conditions for licensed companies that manage portfolios that invest in virtual assets which was released in 2019 (Pro forma terms and conditions). Registered institutions must notify the SFC and HKMA if they wish to provide such services, and they will be required to comply with the proforma terms and conditions.
- Discretionary account management services – Type 1 licensed intermediaries who are authorized by their clients to provide AV trading services on a discretionary basis as an ancillary service must only invest less than 10% of the gross asset value of the client’s wallet in virtual assets.
C. Provision of victim assistance advisory services
Intermediaries providing VA advisory services are required to comply with the following:
- Any regulatory requirements imposed by the SFC and HKMA when providing advisory services, regardless of the nature of the virtual assets;
- AV advisory services should only be provided to existing clients of intermediaries to whom they provide type 1 or type 4 regulated services (securities advice);
- Suitability obligations and intermediaries should only offer AV advisory services to professional investors and perform a knowledge test of virtual assets before providing the services;
- Other applicable conduct requirements set forth in the Licensing or Registration Terms and Terms and Conditions for Licensed Firms or Registered Institutions Providing Virtual Asset Trading Services and Virtual Asset Advisory Services dated January 2022; and
- Where advisory services relate to AV-related products, intermediaries must comply with the requirements for AV-related products set out in section A above and ensure the relevance of the recommendations provided.
D. Implementation and transition period
The joint circular will be implemented immediately for intermediaries not currently engaging in VA-related activities. For intermediaries serving existing VA-related business customers, there will be a six-month transition period for full implementation of the Joint Circular requirements. Given the implementation timeline, intermediaries currently engaging in VA-related activities and those intending to engage in VA-related activities should begin careful product assessment and relevant VA-related services to determine the relevant requirements that will apply pursuant to the Joint Circular, and to ensure that they are properly met within the implementation timeframe.