On October 2023, 10, the Hong Kong Securities and Futures Commission’s official website announced the “Joint Circular on Virtual Asset-Related Activities of Intermediaries”. This circular will lay a compliance foundation for securities firms and banks to conduct C-end retail business, which will soon open up a huge market increment.
Under the previous law, retail customer business could only be conducted by compliant exchanges.After this circular is updated, if securities firms or banks hold virtual asset licenses No. 1 and No. 4, they can conduct virtual asset and security token STO business for C-end retail users by upgrading their virtual asset licenses.In the future, there will be an opportunity to break the deadlock of "few users and little money" in existing compliant exchanges.Open up the Web2 traditional retail investor market of securities firms and banks.
It also clearly points out that digital asset custody can be managed by traditional financial institutions such as banks, and existing Web3 native custodians such as Cobo may face a sharp market shrinkage.
On the other hand, the China Securities Regulatory Commission officially recognizes the legality of the initial public offering (STO) of security tokens (similar to traditional stock IPOs). If a licensed institution passes the review of the Hong Kong Securities Regulatory Commission (SFC), it can issue security tokens STO.
▲ Hong Kong Securities Regulatory Commission’s explanation of complex products
After the licensed exchange OSL issued the first STO in Hong Kong last year, STO progressed slowly, and Taiji Capital just announced the issuance of real estate STO not long ago. It is expected that this new STO regulatory policy will fully open a new regulatory certification window for virtual asset issuance (STO or RWA).
One year after the Hong Kong Virtual Asset Declaration in October last year, the new virtual asset regulatory rules on October 10 will usher in the official implementation of Web10 and virtual assets in Hong Kong, bringing Hong Kong one step closer to becoming a global virtual asset center!
The circular made new explanations on Hong Kong’s virtual asset-related businesses in five aspects, including:
A. Distribution of virtual asset related products (Virtual Asset No. 1 License required)
B. Providing virtual asset trading services (need to hold a virtual asset license No. 7)
C. Providing asset management services for virtual assets (need to hold a Type 9 license for virtual assets)
D. Providing advice on virtual assets (need to hold a Type 4 virtual asset license)
E. Specific implementation methods
The following is a summary of the key points of the original text.
Distributing virtual asset related products
Need to comply with relevant regulations and restrictions
The SFC has allowed 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 for public offering in Hong Kong.
Please note thatVirtual asset-related products are likely to be considered complex products.Intermediaries distributing virtual asset-related products that are considered complex products should comply with the SFC’s requirements for regulating the sale of complex products, including ensuring the suitability of virtual asset-related products (regardless of whether solicitation or recommendation is involved).
▲ How to determine whether virtual asset-related products are complex products
The following additional investor protection measures are imposed on the distribution of virtual asset related products:
1. Sales restrictions – Virtual asset-related products that are considered complex products should only be sold to professional investors.For example, an overseas virtual asset non-derivative ETF is likely to be regarded as a complex product and should only be sold to professional investors.
2. Virtual asset knowledge assessment - Unless the client is an institutional professional investor or a qualified corporate professional investor, the intermediary should assess the client’s knowledge of investing in virtual assets or virtual asset-related products before executing transactions in virtual asset-related products on behalf of the client.If the client does not have the relevant knowledge, the intermediary can only execute the relevant transaction if it has provided the client with sufficient training on the nature and risks of virtual assets. The intermediary should also ensure that the client has sufficient net assets to enable him to bear the risks and possible losses of buying and selling virtual asset-related products.
Please note that the distribution of some products is not subject to the "professional investors only" restriction. These include:
1. "Exchange-traded virtual asset derivatives funds" traded on regulated exchanges specified by the SFC,Such funds can be sold to retail investors after being recognized or approved by the relevant regulatory authorities in designated jurisdictions.
2. Public futures-type virtual asset ETFs that are approved by the Securities and Futures Commission and traded on the Hong Kong Stock Exchange Limited, or that are approved or recognized by relevant regulatory authorities in designated jurisdictions, can be sold to retail investors, and are traded on designated exchanges.
For the above complex exchange-traded derivatives, under the current complex product regime, intermediaries can distribute these products without complying with the suitability requirements and the requirements for providing minimum information and warning statements if there is no solicitation or recommendation involved, but must comply with the existing requirements for derivatives. Intermediaries are also required to conduct a virtual asset knowledge assessment as an additional safeguard.
If an intermediary wants to provide virtual asset trading services
Only virtual asset trading platforms licensed by the Securities and Futures Commission can be used
(CSRC licensed platform) cooperation
In order to provide adequate investor protection, the SFC and the HKMA consider it appropriate and necessary to require intermediaries to provide virtual asset trading services.You can only cooperate with virtual asset trading platforms licensed by the SFC (SFC-licensed platforms), whether by introducing clients to the relevant platforms for direct trading or opening an integrated account with the relevant platforms.
When providing virtual asset trading services, intermediaries should comply with all relevant regulatory requirements imposed by the SFC and the HKMA.Furthermore, intermediaries should only provide such services to clients to whom they provide services in respect of Type 1 regulated activities.
The CSRC particularly emphasized this.Before providing virtual asset trading services to retail clients, intermediaries should:
1. Assess each retail customer’s knowledge of virtual assets and risk tolerance;
2. Set a cap for each retail customer to ensure that the risk taken 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;
3. Ensure that virtual asset trading activities are conducted through omnibus accounts opened and maintained on SFC-licensed platforms that are not subject to licensing conditions that only serve professional investors; and
4. Implement adequate monitoring measures to ensure that its retail customers can only trade virtual assets that are offered to retail investors through SFC licensed platforms;
If an intermediary allows a client to deposit virtual assets into or withdraw virtual assets from its account, it should only deposit or withdraw such client virtual assets through a separate account opened and maintained at the following platforms or institutions:
1. Cooperating with the CSRC licensed platform;
2. An authorized financial institution (or a subsidiary of a locally registered authorized financial institution) that meets the expected standards for the custody of virtual assets issued from time to time by the HKMA.
At the same time, when handling the deposits and withdrawals of such virtual assets, intermediaries should also comply with the provisions of Chapter 12 of the "Guidelines on Combating Money Laundering and Counter-Terrorist Financing (Applicable to Licensed Corporations and Virtual Asset Service Providers Licensed by the Securities and Futures Commission)".
Provisions on asset management services provided by virtual assets
The services provided by the intermediary,If the stated investment objective of a portfolio is to invest in virtual assets; or if there is an intention to invest 10% or more of the total asset value of the portfolio in virtual assets, the additional requirements set out in the Standard Terms and Conditions for Licensed Corporations or Registered Institutions Managing Portfolios Investing in Virtual Assets (Terms and Conditions for Type 9 Regulated Activities) must be complied with.
If a Type 1 (Securities Dealing) intermediary obtainsAuthorized to provide virtual asset trading services on a commission basis as an ancillary service, the intermediary should only invest less than 10% of the total asset value of the client's portfolio in virtual assets.
Intermediaries that provide asset management services for tokenized securities should comply with the existing regulations governing asset management, as well as the conduct standards and guidelines that intermediaries should meet in relation to tokenized securities issued from time to time by the SFC.
Provisions on providing opinions on virtual assets
When providing advice, intermediaries should comply with all relevant regulatory requirements imposed by the SFC and the HKMA, regardless of the nature of the virtual assets involved.Such services should be limited to clients to whom the intermediary provides services for Type 1 (dealing in securities) or Type 4 (advising on securities) regulated activities.
When recommending any virtual asset to a retail client, an intermediary should take all reasonable steps to ensure that the recommended virtual asset:
1. High liquidity. When assessing the liquidity of a specific virtual asset for retail clients to buy and sell, intermediaries should at least ensure that the virtual asset is a qualified large-scale virtual asset, that is, the virtual asset should have been included in at least two accepted indices launched by at least two different index providers;
2. Provided to retail investors for trading by a platform licensed by the Securities and Futures Commission.
Implementation
Intermediaries that currently provide virtual asset trading services to non-qualified corporate professional investors and individual professional investors and intend to continue to provide such services to them should modify their systems and control measures to comply with the updated requirements. Therefore, intermediaries that provide virtual asset trading services to existing customers will be given a three-month transition period before the expected requirements set out in this circular are fully implemented.
Intermediaries that 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 the relevant services.
If an intermediary intends to engage in any activities involving tokenized securities and virtual assets, including providing trading and advice services in relation to virtual asset-related products, tokenized securities and virtual assets, and providing asset management services in relation to virtual assets, or intends to make any changes to the relevant activities conducted (including changes to the categories of clients served),Advance notification must be given to the SFC and, where applicable, the HKMA.
Under the new regulations, whether more institutions will join the Hong Kong layout remains to be seen!
Produced by | Bailu Living Room
Author: Lulululu, blog post