Hong Kong to implement crypto sandbox

The Hong Kong Securities and Futures Commission (SFC) states that it will implement cryptocurrency funds in accordance with the rules of the securities to improve investor protection.

In a circular published on Thursday, the financial regulator stated that investment funds in Hong Kong, which intend to invest more than 10 percent of their gross portfolios in “virtual assets”, directly or indirectly through intermediaries, must be licensed and registered with the agency.

In a note, SFC representatives explained that “virtual assets” are defined as “digital tokens (for example, digital currencies, utilities, or assets) and any other virtual products, crypto assets, and other assets of essentially the same nature.”

This rule applies regardless of whether the underlying cryptocurrency assets match the securities or futures contracts as defined in the Securities and Futures Accounting (SFO).

Ashley Alder, SFC Chief Executive Officer, commented in a press release:

“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.”

Jehan Chu, the managing director of the crypto-investment firm Kenetic Capital in Hong Kong, said that the move comes after the SFC turned to the industry for feedback.

“We are happy to see the SFC taking concrete steps to provide clarity and guidance around digital asset management, distribution of fund interests and trading platforms, which shows that the SFC is willing to support the growth of the crypto and blockchain eco-system in a safe and sustainable manner,” he said.

The regulator also said that he plans to allow the exchange of cryptocurrencies in the city to abandon the new sandbox program to determine whether to introduce a licensing scheme for trading platforms in the future, which is the approach used by the SFC partner in Japan.

The SFC stated that they would closely monitor cryptocurrency exchange transactions and place interested and qualified parties in the standard test environment after careful consideration and testing in the so-called sandbox.

“Factors to be considered include the adequacy and effectiveness of the proposed conceptual framework; ability to comply with the terms and conditions; investors’ interests; as well as local market and international regulatory developments,” the statement reads.

Currently, none of the crypto exchangers in Hong Kong are licensed in accordance with the conceptual framework document published today. If they are provided, they will be subject to intensive reporting and monitoring to ensure rigorous internal controls and to function properly, taking into account investor protection.

Alder added: “We hope to encourage the responsible use of new technologies, as well as provide investors with more opportunities and better results.”