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The Securities and Futures Commission (SFC), the securities regulator in Hong Kong, is bringing additional clarity to cryptocurrency investments made by hedge funds. On October 4, the watchdog released a regulatory circular, which set clear rules governing crypto fund managers and their business practices.
The document, which spans 37 pages, titled “Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets.” In it, the SFC provided conditions for corporations in the region that will be holding portfolios that make investments in crypto tokens.
Capital, compliance, and operations requirements
It defines virtual assets as “digital representations of value which may be in the form of digital tokens,” including digital currencies, utility tokens or security, or asset-backed tokens. The definition also takes into account other virtual commodities, crypto assets, or other assets of essentially the same nature, irrespective of their classification as “securities” or “futures contracts.”
Per the document, cryptocurrency fund managers in Hong Kong are required to maintain a liquid capital of at least 2 million Hong Kong dollars (about $383,000 at press time).
The regulator additionally advises managers to have enough human and technical resources to ensure the efficient maintenance of duties, to adopt proper compliance and risk policies, as well as to implement Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) measures.
The SFC also touches on the issue of funds and asset safety, advising crypto fund managers to appoint functional independent custodians. As the regulator puts it, crypto fund managers will need to ensure that the fund assets should be separated from its own, as well as those of other clients.
If a manager gets fiat currency on behalf of the fund, then they should ensure that they set up one or more segregated bank accounts to hold their clients’ cash. All bank accounts should be set up and maintained with an authorized financial institution in Hong Kong, or a bank established in a jurisdiction that the SFC will approve of.
Also, crypto fund managers are encouraged to evaluate the features of the diverse custodial arrangement, including security controls with key generation, the management of transactions, asset storage, and handling the future forks of blockchains.
A new crypto business hub?
The regulations form part of Hong Kong’s ongoing attempt to create a sustainable environment for the crypto space to thrive. On March 28, the SFC issued official guidance on Security Token offerings (STOs), thus providing a set of legal and regulatory requirements for companies and individuals looking to engage in any STO-related activities.
The watchdog claimed that’s security tokens are “likely to be ‘securities’” under Hong Kong’s Securities and Futures Ordinance, and should be subject to the region’s securities laws.
Thus, unless an exception is made, any Hong Kong-focused STO should be made to get a license and register for dealing in a security. Any violations of this rule, according to the SFC, will be treated as a criminal offense.