1. The Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) have received an increasing number of enquiries from mainland parties regarding the distribution of investment products involving virtual assets1 to clients. Mainland parties have also expressed interest in providing virtual asset trading services to clients.
2. In 2018, the SFC proposed a "professional investors only 2" restriction that applies across the board to all types of virtual asset activities, including the distribution of funds investing in virtual assets. Since then, the virtual asset sector has developed rapidly and has begun to expand into the mainstream financial industry. Over time, investment products have become more solid and more inclined to provide retail and professional investors with access to virtual assets. In particular, the SFC has approved virtual asset trading platforms licensed by the SFC to provide services to retail investors and has approved a number of virtual asset futures exchange-traded funds (virtual asset futures ETFs) for public offering in Hong Kong.
3. The SFC and the HKMA have reviewed the Ethereum policy for domestic persons engaged in virtual asset activities. As the SFC has approved virtual asset futures ETFs and is ready to accept applications for approval of other virtual asset funds, including virtual asset spot exchange-traded funds (virtual asset spot ETFs), the regulator has also updated the relevant policies in response to the latest market developments mentioned above. Specifically, the updated circular:
- clearly set out the requirements that apply to participation in the distribution of virtual asset-related products4; and
- The standards of conduct that listed persons of an issuer should meet when they are listed in a virtual asset fund5 authorised by the SFC (see paragraph 9).
为免生疑问，本通函将取代证监会与金管局于2023年10月20日及2022年1月28日分别发出的两份《有关入境人的虚拟资产相关活动的通联合函》。
A. Issuance of investment products involving virtual assets
4. Although virtual assets are becoming increasingly popular in some parts of the world, the regulatory situation around the world remains different. The SFC pointed out in 2018 that the risks associated with investing in virtual assets still apply. So far, the regulatory situation of the virtual asset industry still applies. Service providers (including personnel custody, virtual asset trading platforms and index providers) may be unregulated, or only regulated in terms of combating money laundering and terrorist financing, or regulated (for example, as payment system regulation). Therefore, they will never be subject to the same strict regulation as service providers or products in traditional financial markets, thereby bringing additional counterparty risks to investment products involving virtual assets. In addition, since there is no uniform approach to their regulation at present, the incremental spot market of virtual assets may have various investor protection issues, ranging from insufficient pricing to potential market speculation. For example, there are currently a number of non-derivative products involving virtual assets overseas (such as virtual asset exchange-traded products (virtual asset ETPs)) that directly invest in virtual assets, all of which may be subject to the above risks.
5. 贵零售投资者可能普遍不理解上述风险，故虚拟资产相关产品6（即符合以下标准的产品：(a)其主要投资目标或策略为投资于虚拟资产；(b)其价值源于虚拟资产虚拟资产的价值及特点；或(c)追踪或模拟虚拟资产的表现达到致近乎稳定或相称的投资结果或回报）相当可能被视为复杂产品。分布被视为“复杂产品”的虚拟资产相关产品（除下文第7及9段所述被视为复杂交易所买卖衍生产品及复杂交易所买卖证监会认可非衍生产品虚拟资产基金的虚拟资产相关产品）的境内人，应遵守证监会在销售综合产品方面的规定7中，货物包括须确保虚拟资产相关产品的适宜性8（具备否涉及招揽或行为建议）。
6. However, given the different regulatory situations for virtual assets around the world, the SFC and the HKMA believe that additional investor measures should be imposed on the issuance of virtual asset-related products to domestic persons under the complex product regime to address the specific risks involved in such products:
6.1. Sales Restrictions – Except for a few products in paragraphs 7 and 9 below, virtual asset-related products that are considered complex products should only be sold to professional investors. For example, an overseas non-derivative virtual asset ETP is likely to be considered a complex product and should only be sold to professional investors.
6.2. Virtual Asset Knowledge Assessment – Waiver of being an institutional professional investor and a qualified corporate professional investor9, otherwise domestic personnel should first assess the client’s situation when investing in virtual assets or knowledge of virtual asset related products before handling transactions in virtual asset related products on behalf of the client10. If the client does not have the relevant knowledge, the insider can only conduct the relevant transaction on the premise that he has provided the client with sufficient training on the nature and risks of virtual assets. The insider should also ensure that the client has sufficient net assets to be able to bear the risks and possible losses of buying and selling virtual asset related products. The criteria for first assessing whether a client can be regarded as having virtual asset knowledge (non-dramatic) are set out in Appendix 1 to this circular.
7. However, there are currently a few virtual asset-related derivatives products traded on regulated exchanges specified by the SFC11 and, for example, exchange-traded virtual asset derivative funds are authorised or approved by the relevant regulators in designated jurisdictions12 for sale to retail consumers. The same can be seen in virtual public asset futures ETFs traded on the Stock Exchange or authorised or approved by the relevant regulators in designated jurisdictions for sale to retail owners and traded on designated exchanges. Therefore, the exchange trading of the above products is not subject to the "professional investors only" restriction. In addition, these products are considered complex exchange-traded derivatives and, under the designed complex product regime, if it is not appropriate and there is no solicitation or recommendation, on-site persons may execute client trading instructions for these products on-site subject to compliance requirements and the requirements for providing minimum stress data and warning statements in paragraph 15.1 below, but must comply with the coding requirements for the relevant derivatives (see paragraphs 12.2 and 13 below). Mainlanders are also required to undergo a virtual asset knowledge assessment as an additional measure (see paragraph 6.2 below).
8. For the avoidance of doubt, whether virtual asset-related derivatives traded on other exchanges must be traded on designated non-exchanges, if they are not of the same type as the complex exchange-traded derivatives products listed in the complete list of non-complex and complex product examples published on the SFC website13, they will all be regarded as complex products. Therefore, when trading virtual asset-related derivatives on these exchanges, they must fully comply with the complex product requirements and adopt the additional safeguards set out in paragraph 6 above.
9. For virtual asset funds authorized by the SFC for public offering, these funds will not be subject to the “professional investors only” restriction. However, the issuance of these funds will be subject to the following provisions:
9.1. In respect of funds listed and traded on the Stock Exchange, if the trade does not involve solicitation or recommendation, the person is opposed to executing client trading instructions in relation to these funds on the exchange under the reverse correspondence requirements or the requirements for providing minimum shrinkage data and statement warnings as stipulated in paragraph 15.1 below. However, the person on the exchange is still required to conduct a virtual asset knowledge assessment on the relevant client (see paragraph 6.2 above); and
9.2. For unlisted funds, or listed funds whose units are traded over the counter14, domestic persons should comply with the suitability requirements and the requirements for providing minimum strength information and warning statements as described in paragraph 15.1 above, regarding the assessment of client knowledge of virtual assets (see paragraph 6.2 of the Understanding).
If these funds are also virtual asset derivatives funds, persons therein must also comply with the coding requirements for the relevant derivatives products (see paragraphs 12.2 and 13 below).
10. Appendix 3 contains a flow chart illustrating the components required when considering whether an investment product involving virtual assets is a complex product, as well as the amendments to the sales provisions that clearly apply.
11. In addition to the complex product regulations, the SFC and the HKMA also wish to remind mainlanders of the sales restrictions that may apply to certain virtual asset-related products in Hong Kong and other jurisdictions, and in particular, they should comply with Section 15 of the Securities and Futures Ordinance. In addition, whether virtual asset-related products can be sold to retail investors depends on the sales restrictions of individual jurisdictions16, exchangesXNUMX or products. Mainlanders should ensure that all relevant sales restrictions are strictly complied with. If virtual asset-related products are distributed on an online platform, the platform must be designed with a labyrinth design and appropriate access rights and control measures to ensure compliance with relevant sales restrictions.
12. Domestic personnel should also have the obligation to provide clients with reasonable and suitable advice where applicable (as supplemented by FAQ 17 on Suitability), including:
12.1. Ensure that the recommendations or solicitations made to clients are suitable for clients in all circumstances. Insiders should be concerned about the risk tolerance and financial situation of clients, and diligently assess whether the nature and characteristics of virtual asset-related products (including the leverage effect and risks of the relevant virtual assets) are suitable for clients and in the best interests of clients;
12.2. If the virtual asset related product is a derivative product, the person involved should ensure compliance with the requirements of paragraphs 5.1A and 5.3 of the Code of Conduct; and
12.3. Conduct in-depth due diligence on virtual asset related products, including (among other things) understanding the risks and characteristics of the relevant products (especially the high-risk nature of the relevant virtual assets themselves), the target investors (including any applicable sales restrictions), and the regulatory status of the relevant products. Appendix 4 to this circular sets out additional due diligence requirements applicable to virtual asset funds that are not authorized by the SFC.
13. As part of the obligations required under paragraph 5.3 of the Code of Conduct, Participants should ensure that their clients understand the nature and risks of virtual asset-related derivative products when assessing whether to provide services to clients. For example, when a domestic person provides trading services for virtual asset futures contracts traded on a designated exchange, it should ensure that clients understand that leveraged trading increases their risk exposure to the volatility of the relevant virtual assets because the market is relatively small and also has a large proportion of the impact on the margin deposited by the client, and the amount of loss by the client may exceed the initial margin deposited. Domestic persons should also provide clients with risk disclosure statements specifically for virtual asset futures contracts (examples of such statements are set out in Appendix 5 to this circular).
14. Given the high-risk nature of virtual assets, domestic persons should adopt a specific attitude when providing financial financing to clients to invest in virtual asset-related products. If domestic persons provide financial financing to clients, they should ensure that clients have sufficient financial capacity to fulfill their responsibilities arising from the trading of virtual asset-related products by leverage or margin (including in the worst case scenario). Participants should not accept instructions from clients if they cannot ensure completion.
15. The waiver is to sell virtual asset related products to institutional professional investors and qualified corporate professional investors. Domestic persons who sell virtual asset related products should:
15.1. provide clients with clear and understandable information and warning statements about crypto-related products and information about the crypto-assets they invest in; and
15.2. Provide clients with a risk disclosure statement specifically for virtual assets (which can be disclosed in a one-time manner). An example of the content of the risk disclosure statement is set out in Appendix 5 of this circular.
B. Providing virtual asset trading services
18. The SFC and the HKMA are concerned that it is clear that overseas virtual asset trading platforms are subject to regulatory standards similar to those set out in the SFC's regulatory framework for virtual asset trading platforms19, and that consumers who trade on such platforms are clearly not adequately protected. For example, such platforms are not subject to any regulatory requirements for customer assets, such as privacy, key management and insurance for online and offline walletsXNUMX. Investors may suffer significant losses and have no recourse in the event of a hacker attack, and may also encounter practical difficulties in recovering their assets from overseas platforms or making claims against such platforms.
17. In order to provide adequate investor protection, the SFC and the HKMA consider it feasible and necessary to stipulate that if domestic persons want to provide virtual asset trading services, they can only cooperate with virtual asset trading platforms licensed by the SFC20 (SFC-licensed platforms), either by introducing clients to the relevant platforms for direct transactions or by establishing integrated accounts with the relevant platforms.
18. Although the provision of virtual asset trading services does not constitute "securities trading", the relevant services may affect the qualification of domestic persons to carry out regulated activities. 21. The buying and selling activities involving virtual assets also constitute part of the trading services provided by domestic persons22. Therefore, when providing virtual asset trading services, domestic persons should comply with all relevant regulatory requirements imposed by the SFC and the HKMA. In addition, domestic persons should only provide such services to their clients in the first category of regulated activities23.
19. The SFC (and where appropriate, in consultation with the HKMA) proposes as a licensing or registration condition the conduct requirements that on-site personnel should comply with when providing virtual asset trading services in an integrated account arrangement (as set out in Appendix 6 to this circular 24). One of the licensing or registration conditions will require onshore persons to comply with prescribed terms and conditions (the “Terms and Conditions”). The standards set out in the “Terms and Conditions” are consistent with the requirements under the SFC’s regulatory framework for virtual asset trading platforms insofar as they relate to the performance of trading functions by onshore personnel25.
20. The SFC and the HKMA wish to emphasise that, under these Terms and Conditions:
(a) Before providing virtual asset trading services to retail clients26, it should:
(i) assessing each retail customer’s awareness of and risk tolerance for virtual assets;
(ii) setting a cap for each retail customer to ensure that the risk borne by the customer in relation to virtual assets is reasonable, taking into account the customer’s financial position (including his/her net worth) and personal circumstances;
(iii) ensuring that virtual asset trading activities are conducted through opening and buying omnibus accounts on a SFC-licensed platform that is not subject to the licensing requirements for professional investor services; and
(iv) implement adequate control measures to ensure that its retail clients can only trade virtual assets that are provided to retail traders through SFC-licensed platforms; and
(b) If a customer is allowed to deposit virtual assets into or withdraw virtual assets from its account, it may only open and maintain an account with the following platforms or institutions to deposit such customer’s virtual assets:
(i) the SFC licensed platform it cooperates with; or
(ii) an authorised financial institution27 (or a subsidiary of a locally incorporated authorised financial institution) that meets the expected standards for virtual asset custody issued by the HKMA from time to time.
When handling deposits and withdrawals of such virtual assets, mainland residents should also comply with the provisions of Chapter 12 of the "Guidelines on Combating Money Laundering and Counter-Money Laundering (Applicable to Licensed Corporations and Virtual Asset Service Providers Licensed by the SFC)".
21. If the first type of domestic persons provide virtual asset trading services as agents28, they should not introduce services and forward any trading instructions to the SFC-licensed platform on behalf of clients or hold any client assets (including virtual currencies). The SFC (and after consulting the HKMA where appropriate) will make the above provisions a condition for licensing or registration29.
22. Market Entrants who provide trading services in Tokenised Securities shall comply with the provisions of the Foreign Exchange Act governing securities trading and the standards of conduct and guidelines issued from time to time by the SFC regarding the conduct that Market Entrants should meet in relation to Tokenised Securities.
C. Providing asset management services in relation to virtual assets
23.至于虚拟资产投资组合的管理公司及虚拟资产委托账户管理服务方面30，境内人员31所提供的服务如符合最低额登机规定（即投资组合的已述明投资目标为投资于虚拟资产；或将投资组合中10%或以上的总资产价值投资于虚拟资产），则须遵守《适用于管理投资于虚拟资产的投资组合的持牌法团或注册机构的标准条款及条件》（第一条9类受规管活动的条款及条件）所载本列的额外规定（见通函附录7 32）。证监会（及在适当情况下经征询金管局意见后）会等规定提出作为发牌或注册条件33。
24. With respect to entrusted account management services, the SFC and the HKMA wish to further clarify that if a Category 34 domestic person obtains authorization from its client to provide virtual asset trading services as ancillary services on a entrusted basis10, the domestic person should only invest less than XNUMX% of the total asset value of the client’s investment portfolio in virtual assets.
25. Domestic persons who provide asset management services for tokenized securities should comply with the provisions of the foreign exchange regulations governing asset management, as well as the standards of conduct and guidelines that domestic persons should meet in relation to tokenized securities issued from time to time by the CSRC.
D. Providing advice on virtual assets
26. The provision of advice on virtual assets constitutes part of the advice business of domestic persons and may therefore affect the appropriateness of domestic persons to carry out regulated activities35. Therefore, when providing advice, domestic persons should comply with all relevant regulatory requirements of the CSRC and the HKMA regarding the nature of virtual assets. In addition, domestic persons should only provide such services to clients of their Type 1 or Type 4 regulated activities36.
27. The expected ethical requirements to be observed when giving advice on virtual assets are set out in the Terms and Conditions (see Appendix 6 to this Circular 37). In particular, the expected ethical requirements to be observed when giving advice on virtual assets are set out in the Terms and Conditions. Responsibility for Advice.
28. When recommending any virtual asset to a retail client, floor staff should take all reasonable steps to ensure that the virtual asset:
(a) have high liquidity. When assessing the liquidity of a particular virtual asset for retail clients to purchase, it should at least be ensured that the virtual asset in question is a qualified large-scale virtual asset, i.e. the virtual asset should have been included in at least two accepted index sales launched by at least two different index providers; and
(b) Provided by the SFC licensed platform for retail trading.
29. Domestic persons providing advice on tokenized securities should comply with the provisions of the Foreign Exchange Regulations governing the provision of advice on securities, as well as the standards of conduct and guidelines that should be met by domestic persons in relation to tokenized securities issued from time to time by the CSRC.
E. Implementation
30. Participants who currently provide virtual asset trading services to non-qualified corporate professional investors38 and individual professional investors39 and continue to provide such services to them should modify their respective systems and control measures to comply with the updated requirements. As stated in the Joint Circular on Virtual Asset Related Activities of Domestic Persons issued by the SFC and the HKMA on 2023 October 10, a transitional period of three months will be granted to domestic persons who provide virtual asset trading services to their existing clients before the expected full implementation of the requirements20. For the avoidance of doubt, the transitional period will end on 40 January 2024. Domestic persons who are not currently engaged in virtual asset related activities, or plan to expand their virtual asset trading services to cover non-qualified corporate professional investors, individual professional investors or retail investors, should ensure that they are able to comply with the requirements set out in this circular before launching such services.
31. A mainland person who (a) engages in any activities involving virtual assets, including the provision of trading and advisory services in relation to virtual asset-related products and virtual assets and the provision of asset management services in relation to virtual assets41, or (b) experiences any fluctuations in the value of virtual assets in relation to the relevant activities conducted (including fluctuations in the types of clients served), must notify the SFC and (where applicable) the HKMA in advance.
For enquiries, please contact the relevant Director of the SFC or the Banking Conduct Department of the HKMA (as the case may be).
Securities and Futures Commission Hong Kong Monetary Authority
Domestic Institutions Department Banking Conduct Department
With accessories
Complete
1 “Virtual asset” means any “virtual asset” as defined in section 53ZRA of the Anti-Money Laundering and Counter-Terrorist Financing Regulations (AMLR).
2 As defined in section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance.
3 See the SFC circular on 2023 December 12 regarding SFC-authorised funds involving virtual assets.
4 See the definition of “virtual asset-related products” in paragraph 5.
5 See the definition of “virtual asset fund” in footnote 6.
6 For the purpose of this circular, “virtual asset ETFs”, “virtual asset ETPs”, “virtual asset funds”, “virtual asset derivative funds”, “virtual asset derivative ETPs” and “virtual asset-related derivatives” refer to exchange traded funds, exchange traded products, funds and derivatives that meet criteria (a), (b) or (c) (as the case may be) and are therefore virtual asset-related products.
7 Please refer to paragraph 5.5 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “Code of Conduct”) and Chapter 6 of the Guidelines on Online Offering and Investment Advisory Platforms.
8. Inclusion will include ensuring that the client’s proposed investment in virtual asset-related products is reasonable based on the client’s judgment as a domestic person, taking into account the client’s financial situation (including his or her net worth) and personal circumstances.
9 《操守基准》第15.2段将“机构专业投资者”定义为属于《证券及期货条例》附表1第1部第1条“专业投资者”的定义第(a)至(i)段所“合资格的法团专业投资者”是指已通过《操守准则》第15.3A段的评估规定及完成第15.3B段程序的法团专业投资者。
10On-site personnel can conduct a one-time knowledge assessment before trading in virtual asset-related products.
11 Refers to the designated exchanges listed in Schedule 571 to the Securities and Futures (Financial Resources) Rules (Cap. 3N) and The Stock Exchange of Hong Kong Limited (SEHK).
12 A list of designated jurisdictions is set out in Appendix 2 to this circular.
A non-exhaustive list of 13 examples of non-complex and complex products is available at https://www.sfc.hk/TC/Rules-and-standards/Suitability-requirement/Non-complex-and-complex-products. For example, virtual asset derivative ETPs are not of the same type as the examples of complex exchange-traded derivatives on the list.
14Including unlisted shares/unit classes of virtual asset futures ETFs/virtual asset spot ETFs authorised by the SFC.
15 Some jurisdictions, such as mainland China, may prohibit the sale of virtual asset-related products to mainland investors.
16 For example, the rules of an instrument-sized futures exchange for virtual asset futures contracts and subscriptions traded on that exchange may prohibit the sale of such futures contracts to retail retailers.
17 “Frequently Asked Questions on the Suitability Obligation of Licensed or Registered Persons to Provide Clients with Reasonable and Suitable Advice” and “Frequently Asked Questions on Triggering the Suitability Obligation” (the “Suitability FAQs”).
18 Hong Kong is one of the few major jurisdictions that has introduced a comprehensive framework for virtual asset trading platforms from an investor perspective. The framework includes key provisions such as safekeeping of client assets, knowing your customer, combating money laundering, preventing market crowding, blocking looted virtual asset assets, cybersecurity and risk management. For more details, please refer to the "Guidelines for Virtual Asset Trading Platform Operators" issued by the SFC.
19 “Online wallets” or “online storage methods” refer to the practice of storing the private keys of virtual assets online. Since “online wallets” or “online storage methods” are connected to the Internet, they are more vulnerable to hacker attacks. “Offline wallets” or “offline storage methods” refer to the practice of storing the private keys of virtual assets in a non-network environment.
20 Virtual asset trading platforms licensed under section 116 of the Securities and Futures Ordinance and/or section 53ZRK of the Anti-Money Laundering Ordinance. For the avoidance of doubt, SFC licensed platforms do not include those deemed to be issuing platforms under Schedule 3G of the Anti-Money Laundering Ordinance.
21 Under section 129 of the SFO, the SFC may take into account the state of any other business of the corporation.
22 The SFC and the HKMA currently only intend to allow domestic persons who are licensed or registered for Category XNUMX (securities trading) regulated activities to provide virtual asset trading services.
23 See supra note 22.
24经修订的该等条款及条件的标注版本（与2022年1月28日所发表的该等条款及条件比较）载于附录6a。
25 For example, all client trading instructions should be pre-funded (i.e. a domestic person should only execute a transaction for a client if there is sufficient base currency or virtual asset in the client’s account to cover the transaction), and domestic persons should not provide any financial accommodation to their clients to enable them to purchase virtual assets.
26 “Retail Client” means any person other than a Professional Investor.
27 “Authorized financial institution” means an authorized institution under section 2(1) of the Banking Ordinance.
28 Under the introducing agent model, domestic clients will establish a client business relationship with the CSRC-licensed platform and directly trade across the platform. The trading account on the platform will be opened in the name of the relevant client. Confirm that a written agreement is signed with the CSRC-licensed platform to specify the respective responsibilities of the floor personnel and the CSRC-licensed platform under the introduction arrangement.
29根据《证券及期货条例》第116(6)或119(5)条（视属何情况而定）。
30 Refers to providing entrusted account management services in the form of a set authorized investment range or a preset standard investment portfolio, and charging management fees or performance fees in return.
31 The SFC and the HKMA currently only intend to allow domestic persons who meet the minimum entry requirements and are licensed or registered for Category 9 (asset management) regulated activities to provide asset management services for virtual assets.
32经修订的第9类受规管活动的条款及条件的标注版本（与2019年10月4日所发表的第9类受规管活动的条款及条件）比较载于附录7a。
33根据《证券及期货条例》第116(6)或119(5)条（视属何情况而定）。
34 Such activities are carried out wholly incidentally by the personnel present for the provision of services in respect of Type 1 regulated activities.
35 The SFC and the HKMA currently only intend to allow domestic persons licensed or registered for Type XNUMX (dealing in securities) or Type XNUMX (advising on securities) regulated activities to provide advice on virtual assets.
36 See supra note 35.
37经修订的该等条款及条件的标注版本（与2022年1月28日所发表的该等条款及条件比较）载于附录6a。
38 “Non-Qualified Corporate Professional Investor” means a corporate professional investor that has not passed the assessment requirements under paragraph 15.3A of the Code of Conduct or has not completed the procedures required under paragraph 15.3B.
39 “Individual Professional Investor” means an individual within the meaning of section 5 of the Securities and Futures (Professional Investors) Rules.
40 For the avoidance of doubt, Existing Personnel may continue to provide virtual asset related services to their existing clients provided that such clients have been assessed by the Existing Personnel to have knowledge of virtual assets based on the results of the virtual asset knowledge test conducted by them before the date of this circular.
41 Circular to Domestic Persons Regarding Compliance with Notification Requirements issued by the CSRC on June 2018, 6.