Crypto Assets Go Mainstream – New SFC And HKMA Guidance For Intermediaries And Banks On


This year has seen significant developments in Hong Kong as
detailed regulatory guidance has been issued to enable institutions
to navigate the evolving crypto-asset landscape. With increasing
demand to provide virtual asset (VA)-related
services and products, the guidance is a welcome step for the
industry as it seeks to clarify what firms are able to do in this
fast-changing area. In this article, we explore the detailed, and
often complex, requirements on intermediaries and banks that wish
to engage in VA-related activities.

The guidance comes in the form of a 
joint circular
 issued by the Securities and Futures
Commission (SFC) and the Hong Kong Monetary
Authority (HKMA). It was issued to intermediaries
(ie, licensed corporations and registered institutions), and
provides updated guidance on VA-related activities. This will
replace the SFC’s circular of 1 November 2018 on
distribution of VA funds.

The joint circular deals with investor protection issues arising

  1. distribution of VA-related products;
  2. provision of VA dealing services;
  3. provision of
    VA advisory services.

In addition, the HKMA has issued a separate circular to provide guidance to
authorised institutions (AIs) on what they should
pay attention to when dealing with matters relating to VAs and VA
service providers.

The publication of this guidance follows a number of regulatory
reforms in Hong Kong in the past few years relating to VAs. Herbert
Smith Freehills has been following these developments closely and
our earlier bulletins can be found here for reference:

  1. launch of the SFC’s regulatory framework for
    VA fund managers and VA fund distributors
     in November
    2018 (now superseded) – see our bulletin here;
  2. publication of the SFC’s licensing conditions
    for VA fund managers
     in October 2019 – see our
    bulletin here;
  3. publication of the SFC’s position
    setting out a new regulatory
    framework for the licensing of centralised VA trading
     in November 2019 – see our bulletin here;
  4. publication by the Financial Services and the Treasury Bureau
    of its consultation conclusions on a regulatory regime
    for VA service providers 
    in May 2021 – see our
    bulletin here; and
  5. publication of the HKMA’s discussion paper on
    crypto-assets and stablecoins 
    in January 2022 – see
    our bulletin here.

Key points to note

Joint SFC-HKMA circular to

  • The joint circular covers a range of VA-related activities by
    intermediaries in light of the rapidly evolving developments in VA
    products and services. It sets out some new requirements (such as
    additional investor protection measures) and reminds intermediaries
    of the existing requirements that apply to the relevant activities.
    We highlight these in more detail below.
  • The joint circular no longer takes an overarching
    “professional investors (PIs) only”
    approach to VA activities. As discussed below, certain VA-related
    exchange-traded derivative products may be distributed to non-PIs,
    subject to complying with all relevant investor protection
  • Intermediaries that are already engaging in VA-related
    activities have a six-month transition
    period (ie, until 28 July 2022) to comply
    with the joint circular. They should make necessary adjustments to
    their policies, procedures, systems and controls to comply with the
    new requirements as well as ensure compliance with existing
  • Intermediaries that do not currently engage in VA-related
    activities must ensure that they are able to comply with the joint
    circular before introducing VA-related
    services. They are required to notify the SFC (and the HKMA, where
    applicable) in advance if they intend to
    engage in such activities (see SFC circular of 1 June 2018).

HKMA circular to AIs

The HKMA circular took effect on 28
January 2022
. Before engaging in any VA-related
activities, AIs should:

  • ensure that such activities will not breach any applicable laws
    and regulations in Hong Kong or any other relevant jurisdictions,
    seeking legal advice where necessary;
  • undertake risk assessments to identify and understand the
    associated risks; and
  • discuss with the HKMA (and other regulators where appropriate)
    and obtain the HKMA’s feedback on the adequacy of their
    risk-management controls before launching relevant products or

The HKMA circular also provides guidance on issues such as
prudential risks, anti-money laundering, counter-terrorist
financing and financial crime risk.

Further details on the HKMA circular to AIs are set out in our
note here.

VAs and VA-related products

VAs refer to digital representations of value which may be in
the form of digital tokens (such as utility tokens, stablecoins or
security-backed or asset-backed tokens) or any other virtual
commodities, crypto assets or other assets of essentially the same
nature, irrespective of whether or not they amount to
“securities” or “futures contracts” as defined
under the Securities and Futures
 (SFO), but excludes digital
representations of fiat currencies issued by central banks.

For the purpose of the joint circular, VA-related products refer
to investment products which:

  • have a principal investment objective or strategy to invest in
  • derive their value principally from the value and
    characteristics of VAs; or
  • track or replicate the investment results or returns which
    closely match or correspond to VAs.

Distribution of VA-related products

(A) Complex product regime

Intermediaries distributing VA-related products considered to be
complex products (except for the VA-related complex
exchange-traded derivatives mentioned in paragraph 8 of the joint
circular) should comply with the SFC’s requirements governing
the sale of complex products, including ensuring the suitability of
VA-related products, irrespective of whether or not there has been
a solicitation or recommendation.

  • Appendix 3 to the joint circular contains
    a flowchart illustrating the factors for determining whether or not
    a VA-related product is a complex product.
  • The complex product regime requirements are set out in
    paragraph 5.5 of the Code of Conduct for Persons Licensed
    by or Registered with the Securities and Futures
     and Chapter 6 of the Guidelines on
    Online Distribution and Advisory Platforms
  • The VA-related exchange-traded derivatives mentioned in
    paragraph 8 of the joint circular (which are exempted from the
    complex product regime requirements) are those VA-related
    derivative products that are traded on regulated exchanges
    specified by the SFC and, in the case of exchange-traded VA
    derivative funds, are authorised or approved for offering to retail
    investors by the respective regulator in a designated jurisdiction
    listed in Appendix 2 to the joint circular.

(B) Additional investor protection

The SFC and the HKMA have imposed additional investor protection
measures to cover the specific risks associated with VA-related

Firstly, VA-related products which are
considered complex products (except those exchange-traded
derivatives referred to in paragraph 8 of the joint circular, as
discussed above) should only be offered to PIs.

Secondly, intermediaries should assess whether
clients (except institutional PIs and qualified corporate PIs)
have knowledge of investing in VAs or VA-related products, prior to
effecting a transaction in VA-related products on their behalf.

  • Appendix 1 to the joint circular sets out
    non-exhaustive criteria for assessing whether a client can be
    regarded as having knowledge of VAs. For example, such knowledge
    will be considered to be present if the client has undergone
    training or attended courses, the client has current or previous
    work experience related to VAs or VA-related products, or the
    client has executed five or more transactions in any VA or
    VA-related product within the past three years.
  • If a client does not possess VA knowledge, the intermediary may
    only proceed if, by doing so, it would be acting in the
    client’s best interests and it has provided training to the
    client on the nature and risks of VAs.
  • 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.

(C) Other existing requirements to

  • Selling restrictions – Intermediaries
    should observe the selling restrictions in Hong Kong and other
    jurisdictions which may be applicable to a particular VA-related
    product, for example, Part IV of the SFO which prohibits offering
    to the Hong Kong public investments that have not been authorised
    by the SFC. Depending on the selling restrictions specific to a
    particular jurisdiction, exchange or product, a VA-related product
    may or may not be offered to retail investors.
  • Online distribution – Where the
    VA-related products are distributed on an online platform, the
    platform must be properly designed and have appropriate access
    rights and controls to ensure compliance with selling
  • Suitability obligations – Intermediaries
    should observe the suitability obligations (where applicable), such
    as ensuring that recommendations or solicitations made are suitable
    for clients in all circumstances, and conducting proper due
    diligence on the products (including understanding their risks and
    features, the targeted investors and the products’ regulatory
    status). Additional due diligence requirements for unauthorised VA
    funds are set out in Appendix 4 to the joint circular.
  • VA-related derivative…

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