The securities regulator and the central banking institution of Hong Kong have updated the region’s crypto policy in response to enquiries from the industry. In a circular on the virtual asset-related activities of intermediaries, the authorities introduced additional measures to protect retail investors, restricting their access to what they describe as “complex products.”

Hong Kong Updates Regulations for Virtual Asset Service Providers in Light of Market Developments

Hong Kong’s initial approach to regulating crypto assets, adopted five years ago, boiled down to limiting various activities in the market to professional investors only. Since then, however, the range of investment products offering exposure to virtual assets has expanded significantly and, for example, regulators allowed crypto trading platforms to serve retail investors.

In the light of market developments and in response to an increasing number of enquiries from industry players who want to further expand retail access to virtual asset (VA) products and services, the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) have released a joint circular updating their policy in that regard.

The authorities pointed out that due to the still uneven global regulatory landscape, the risks they highlighted in 2018 are still valid today. They also noted that as crypto platforms may be unregulated or partially regulated, they may not be subject to the same standards that apply to service providers in the traditional financial space, posing additional risks.

“As these risks are not reasonably likely to be understood by a retail investor, VA-related products are very likely to be considered complex products,” the regulatory institutions said. Hence, intermediaries distributing such crypto products should comply with the SFC’s requirements for selling complex products, the announcement emphasized.

The SFC and the HKMA insisted that investor protection measures, supplementing the requirements under Hong Kong’s complex product regime, should be imposed to cover specific risks associated with VA products, pointing to a number of overseas non-derivative products such as crypto exchange-traded funds (ETFs) and exchange-traded products (ETPs) as an example.

The regulatory bodies are convinced that it’s necessary to impose additional measures to protect investors. These include allowing the offering of VA-related products which are considered complex only to professional investors. The government agencies elaborated:

For example, an overseas VA non-derivative ETF would very likely be considered a complex product and it should only be offered to professional investors.

Intermediaries should also assess whether retail investors have the knowledge to invest in virtual assets or VA-related products before they process a crypto transaction on their behalf. “If a client does not possess such knowledge, the intermediary may only proceed if it has provided adequate training to the client on the nature and risks of virtual assets,” the regulators said. “Intermediaries should also ensure that their clients have sufficient net worth to be able to assume the risks and bear the potential losses of trading VA-related products,” they added.

Hong Kong set out to become a hub for crypto assets and businesses as part of efforts to revive its status of a global financial center after the Covid-19 pandemic. The revised rules for the industry come in the wake of the crackdown on JPEX. The fraud probe of the crypto exchange resulted in the suspension of some of its activities and arrests as well as increased regulatory scrutiny over the entire sector. Earlier in October, the SFC and the Hong Kong police formed a special unit to monitor cryptocurrency exchanges.

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