SFC articulates regulatory action on the cryptocurrency industry

Bovill

The Securities and Futures Commission (SFC) has put the crypto industry on notice that it is concerned that cryptocurrency trading platform operators and fund managers investing in virtual assets could pose investor protection risks.

The SFC are acting now since the market for virtual assets encompassing digital currency, digital tokens and other crypto assets is now over $200 billion. The regulator also acknowledges to date that many such operators have fallen outside the supervision of the SFC due to certain virtual assets not being captured under the legal definition of “securities”. The SFC are well aware that clients of a cryptocurrency trading platform or fund managers that invest in virtual assets run the same risks that are associated with traditional financial assets. Risks of money laundering, safe custody of assets, conflicts of interest and fraud still apply. Clients trading or fund investing in virtual assets that are not classified as securities have not been afforded the protections legislated under the Securities and Futures Ordinance (SFO). Safe custody of assets, fair markets, fitness and the financial soundness of trading platform operators are just some of the areas that could pose risk for clients in the absence of regulatory supervision.

Further increasing the risks, clients could be exposed to low standards of cybersecurity protection for their assets that do not match the expectation of securities regulators. Given the number of published cybersecurity breaches in the cryptocurrency trading platform industry, there is good reason for concern.

Regulatory Sandbox for trading operators of virtual assets

The SFC are now providing virtual asset trading operators an opportunity via its ‘Regulatory Sandbox’ – a conceptual framework for those operators who want to demonstrate to their clients a high level of standards and practices, such as demanded for a licenced operator, and set themselves apart from those who do not wish to seek a licence. The opportunity for crypto operators offered by the SFC is a path towards compliance via the Regulatory Sandbox where the SFC can examine the business model and decide whether a platform operator can meet the requirements of a licenced regulated entity. If the SFC determines an operator can be regulated the firm can progress to a stage of implementing controls to meet SFC concerns and then eventually exit the sandbox as a fully registered regulated entity.

The SFC has strengthened their regulation on those fund managers wishing to, or already investing in virtual assets. Licensed corporations are required to inform the SFC if they manage portfolios investing in virtual assets and comply with SFC terms and conditions. Moreover, firms that distribute funds that invest solely or partially in virtual assets will require to be licensed for a Type 1 regulated activity (dealing in securities).

How we can help

Bovill is watching the developments in this industry globally with keen interest. We can assist all types of firms with sound and practical advice on licensing matters and how to attain the high compliance standards expected by regulators.

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