Hong Kong Securities and Futures Commission

The Hong Kong Securities and Futures Commission (SFC) yesterday unveiled a comprehensive set of regulations governing cryptocurrencies in a move to enhance investor protection.

While cryptocurrency is not yet believed to pose a major systemic risk to the financial market, there is a broad consensus among securities regulators that they pose significant investor protection risks. The regulatory response to these risks varies in different jurisdictions, depending on the regulatory remit, the scale of the activities and their impact on investor interests and whether virtual assets are deemed financial products suitable for regulation.

This is especially so since Bitcoin’s meteoric rise at the end of 2017 and subsequent fall in value. Consequently, many new cryptocurrency exchanges and products have also mirrored Bitcoin’s rise and fall – bringing investors down with them as well. Virtual assets are generally not backed by physical assets or guaranteed by the government. They have no intrinsic value, and there are currently no generally accepted valuation principles governing certain types of virtual assets.

The cryptocurrency rally in 2017 was driven mainly by institutional investors in the expectation the virtual assets could soon find wider uses in payments, while retail investors joined the rally for short term gains.

Therefore, the new rules, announced by the SFC, will target funds that invest in digital currencies as well as the trading platforms on which these virtual currency are traded. The new regime will ban retail investors from trading bitcoin via these funds or platform, but allow professional investors.

The move is believed to help Hong Kong become a major centre for cryptocurrency trading. In a statement, Ashley Alder, the CEO of the SFC, said, “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. We hope to encourage the responsible use of new technologies and also provide investors with more choices and better outcomes.”