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Hong Kong introduced new rules for Virtual Asset Fund Managers

Oct 10, 2019

Hong Kong has introduced a new regulatory framework for managers controlling virtual asset portfolios. New terms and conditions released by Hong Kong’s Securities and Futures Commission (SFC) have emerged in the light of increasing concerns about the risks associated with investing in crypto assets. Regulatory standards for virtual asset fund managers provide detailed guidance on risk management, segregation of assets, custodianship, funds structure, and other legal aspects.

Virtual assets under the present Terms and Conditions are defined as digital representations of value including digital currencies, digital tokens, crypto assets or any other virtual commodities.

The document provides that fund managers investing in virtual assets must always maintain certain liquid capital. At this point, the capital should comprise 3 million Hong Kong dollars. Moreover, to ensure the safety of fund assets, it is now required to appoint an independent custodian and make sure that the assets of the fund are segregated from the assets of the fund manager. Apparently, it is important for the virtual asset managers to consider whether the institution is capable of dealing with crypto assets when choosing a custodian.

Besides, fiat currency must also be kept separate. Where a virtual asset fund manager receives the fiat currency on behalf of the client, a segregated bank account must be established at one of the licensed Hong Kong’s financial institutions.

The document also emphasizes the importance of sufficient human and technical resources, as well as the experience of the virtual asset manager. Such duties as fund management, operations, compliance, due diligence, risk management, audit should be performed by qualified and experienced persons.

Also, under the de minimis requirement, virtual fund managers should only allow professional investors to invest in any virtual asset portfolios.

The newly-introduced regulation also outlines the rules on participation in Initial Offerings (ICOs). It explains that virtual asset managers have to ensure the fair allocation of tokens purchased and provide records revealing (I) the intended basis of allocation before a transaction is effected; (II) the actual allocation after the transaction is effected; and (III) the reasons for the differences between the intended and actual allocations, are made.

Hong Kong has a reputation as one of the most progressive regions for cryptocurrency. The region takes the leading position in the development of measures, including the present rules, to boost the digital asset sector.

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