Hong Kong's primary financial markets regulator, the Securities and Futures Commission (SFC) last week introduced a new regulatory framework to guide the activities of licensed corporations that exist as virtual asset (crypto) fund managers.
As per a statement issued by the SFC to usher in the new rules, crypto fund managers refer to:
portfolio managers who have a stated investment objective to invest in cryptocurrencies
portfolio managers that plan to spend ten percent (10%) or more of the gross asset value of the portfolio in cryptocurrencies.
For entities that fall into these categories, their operations would now be closely worked by the SFC as they ensure compliance with the newly established rules.
Overview of Hong Kong's New Rules for Crypto Fund Managers
In the 37-page document titled “Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets,” the SFC issued rules which include but are not limited to the following:
Fund managers must maintain a liquid capital of at least 3 million Hong Kong dollars ($383,000), and its variable required liquid capital.
Fund managers must abide by risk management policies such as Anti Money Laundering and Counter-Terrorism Financing (AML/CFT).
Fund managers must appoint a functional third party custodian to hold its assets and also ensure that the company's assets are kept separate from client assets except in cases where they’re stored in a single client account.
Similarly, asset managers that receive fiat from its clients must create one or more Hong Kong-based bank accounts to hold the funds.
In order to ensure high-security standards, fund managers were also required to consider the features of diverse custodial arrangements, including hardware and software infrastructure. They must also imbibe the best security controls over wallet key generation, storage, management, and transaction as well as the process of handling blockchain forks.
Notably, the new rules rolled out by Hong Kong's SFC for crypto fund managers follow up on earlier regulations that the regulator issued for security token offerings (STOs) targeting residents of the prestigious Chinese region.
Such regulatory clarity could potentially set the region to attract crypto-related startups that are searching for regulator friendly jurisdictions to set up their business.