On December 12, the Hong Kong Securities and Futures Commission issued the "Circular on the Hong Kong Securities and Futures Commission Authorizing Funds to Invest in Virtual Assets" and the "Joint Circular on Virtual Asset-Related Activities of Intermediaries". The "Circular on the Hong Kong Securities and Futures Commission Authorizing Funds to Invest in Virtual Assets" specifically clarified that public fund products with virtual assets accounting for more than 22% must meet relevant requirements in terms of management companies, investment in virtual asset tokens, subscription and redemption of virtual assets, investment strategies, fund custody, spot virtual asset valuations, and service providers.
According to current regulations, generally speaking, the proportion of virtual assets in the fund portfolio of institutions holding the Hong Kong Securities Regulatory Commission's Type 9 license shall not exceed 10%. The latest circular clearly states that if the proportion of virtual assets exceeds (or is expected to exceed) 10%, the management institution must submit an application to the Hong Kong Securities Regulatory Commission, and the relevant products can only be sold to Hong Kong investors after approval by the Hong Kong Securities Regulatory Commission.
The "Circular on the Hong Kong Securities and Futures Commission Authorizing Funds to Invest in Virtual Assets" specifies specific requirements for virtual asset funds. The main requirements are as follows:
management company
For companies that manage virtual asset funds (funds with virtual assets accounting for more than 10%), the management company must have a good compliance record and at least one employee of the company has experience in managing virtual assets or related products. The management company must meet the existing or new requirements of the licensing regulator for virtual asset management companies.
Investment Target
Regarding investment tokens, the Hong Kong Securities and Futures Commission pointed out that "virtual asset funds authorized by the Securities and Futures Commission are limited to investing (directly or indirectly) in tokens that can be traded by the Hong Kong public on licensed virtual asset trading platforms authorized by the Securities and Futures Commission." If investing in futures products, it is necessary to invest in futures contracts traded on exchanges and trading platforms authorized by the Hong Kong Securities and Futures Commission.
Investment Strategy
In terms of investment strategy, the Hong Kong Securities and Futures Commission pointed out that "virtual asset funds authorized by the Securities and Futures Commission may directly or indirectly invest in eligible virtual asset tokens in accordance with relevant requirements."
In terms of futures investment, the Hong Kong Securities and Futures Commission pointed out that "for virtual asset futures, they are limited to those traded on traditional regulated futures exchanges, and companies that manage virtual asset funds must ensure that the relevant virtual asset futures have sufficient liquidity. At the same time, the roll cost of the relevant virtual asset futures is controllable, and virtual asset fund companies should explain how to manage these roll costs."
In terms of leveraged investment, the Hong Kong Securities and Futures Commission clearly stated that "virtual asset funds authorized by the Securities and Futures Commission are not allowed to leverage investments in virtual assets at the fund level."
Regarding funds that mainly adopt futures investment strategies, the Hong Kong Securities and Futures Commission stated that "virtual asset funds authorized by the Securities and Futures Commission should adopt active investment strategies to make the investment portfolio flexible (such as diversified futures positions and multiple expiration dates), while also having rollover strategies and the ability to respond to any market disruption events."
The Hong Kong Securities and Futures Commission also emphasized that "indirect exposure to eligible virtual assets through trading products on other exchanges must comply with the requirements set out in the UT Code and may be subject to other relevant regulations imposed by the Securities and Futures Commission for such situations."
Custodian
In terms of custodians, virtual asset funds approved by the Hong Kong Securities and Futures Commission must use virtual asset platforms or financial institutions approved by the Hong Kong Securities and Futures Commission for virtual asset custody. The relevant virtual asset platforms or financial institutions must meet the requirements of the Hong Kong Monetary Authority for custodians.
The Hong Kong Securities and Futures Commission also has clear requirements for the details of custodians and trustees. The Securities and Futures Commission pointed out that:
“The trustee/custodian and any representative responsible for the safekeeping of a virtual asset fund authorised by the SFC shall comply with the following provisions:
1. It should ensure that the assets held by the virtual asset fund are separated from its own assets and the assets of other customers;
2. Most of the assets of the virtual asset fund should be placed in a cold wallet. In addition to meeting the needs of subscription and redemption, the time that virtual assets are stored in a hot wallet should be minimized;
3. Ensure that the "seed phrase" and private keys are securely stored in Hong Kong; strictly limit authorized personnel; be able to prevent the occurrence of events (for example, by generating private keys in an uncertain manner, etc.) and resist collusion (through measures such as multi-signature and sharding); and be able to provide appropriate support to mitigate any single point of failure. "
Virtual Asset Valuation
In terms of virtual asset valuation, the Hong Kong Securities and Futures Commission pointed out that "for the valuation of spot virtual assets, virtual asset fund management companies authorized by the Securities and Futures Commission should adopt trading methods based on major trading platforms (i.e. benchmark indices published by reputable suppliers that reflect a large share of underlying spot trading activities) for valuation."
service provider
In terms of service providers, the Hong Kong Securities and Futures Commission requires that "virtual asset fund management companies ensure that all necessary service providers (such as fund managers, market makers and index providers, etc.) must have the relevant qualifications of the Hong Kong Securities and Futures Commission for virtual asset fund operations and services."
In summary, the Hong Kong Securities and Futures Commission has clarified the management requirements for virtual asset funds by issuing relevant circulars, aiming to strengthen the supervision of virtual asset funds, protect the legitimate rights and interests of investors, and promote the healthy development of the virtual asset fund market. The Hong Kong Securities and Futures Commission's position on the reservation clause reflects the regulatory authorities' attention to the development of the virtual asset investment field and their determination to ensure compliance and orderly development of the market.