Fund managers will need to meet licensing conditions.
The Securities and Futures Commission (SFC) has unveiled new rules designed to bring virtual asset portfolio managers and distributors of virtual asset funds under its regulatory net in a bid to regulate a market that has sharply fallen after its breakneck pace of growth.
Although the regulator admits that virtual assets do not pose a risk to financial stability, such cryptocurrencies, assets and digital tokens may pose significant investor risk especially with regards to valuation, volatility, liquidity; accounting and auditing; cybersecurity; market integrity; risk of money laundering and fraud.
“Owing to the serious investor protection issues identified and having regard to international developments, the SFC considers it necessary to explore in earnest whether and if so, how it could regulate virtual asset trading platforms under its existing powers,” the regulator said in a statement.
Under existing regulatory rules in Hong Kong, the market for such assets are not subject to SFC oversight if they fall outside of the legal definition of ‘securities’ or ‘futures contracts.’
The SFC has therefore proposed that firms intending to manage or already managing portfolios investing in virtual assets fall under its purview and must meet licensing conditions irrespective of whether the virtual assets qualify as securities or futures contracts.
Applicants and corporations are also required to inform the SFC if they are presently managing or intending to manage portfolios that invest in virtual assets and will be therefore subject to the same regulatory requirements such as subsidiary legislation and code of conduct.
"The measures announced today allow us to regulate the management or distribution of virtual asset funds in one way or another so that investors’ interests would be protected either at the fund management level, at the distribution level, or both," Ashley Alder, SFC CEO said in a statement.
The regulator also outlined a conceptual framework for the potential regulation of asset trading platforms under the regulator’s sandbox. It will assess operations of such operators and compliance with requirements in the sandbox environment.
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