Hong Kong regulator imposes new terms and conditions on virtual asset fund managers


The Securities and Futures Commission (SFC) in Hong Kong has published pro forma terms and conditions which will be imposed on SFC-licensed virtual asset fund managers as a condition of their licence. All virtual asset fund managers will now be subject to the pro forma set of terms and conditions, subject to minor variations depending on individual business models and circumstances.


The SFC announced back in November 2018 a regulatory framework which would apply to SFC licensed firms which managed, or planned to manage, funds which included virtual assets. As part of this framework, the SFC is imposing terms and conditions on such “virtual asset fund managers” as a condition of their licence. It has now released the pro forma set of terms and conditions on its website.

The SFC intends for all virtual asset fund managers to meet the same standards, subject only to minor variations depending on individual business models and circumstances. This is regardless of whether the assets invested in amount to securities or futures. The aim is to ensure a consistent and high level of investor protection.

The introduction of the regulatory framework last year is not an attempt to bring all virtual assets into the SFC’s regulatory perimeter, but rather to create an enhanced set of rules for SFC licensed firms who are dealing with unregulated instruments, such as virtual assets, in addition to their activities involving regulated instruments.

What constitutes a “virtual asset fund manager”?

To fall within this definition, a firm must:

  • be licensed by the SFC;
  • manage a fund, or portion of a fund, that invests in virtual assets; and
  • either (a) have a stated fund investment objective to invest in virtual assets or (b) intend for a fund to invest 10% or more of its gross asset value in virtual assets.

The SFC has a wide definition for “virtual assets”, which covers “digital representations of value which may be in the form of digital tokens (such as digital currencies, utility tokens or security or asset-backed tokens), any other virtual commodities, crypto assets or other assets of essentially the same nature, irrespective of whether they amount to “securities” or “futures contracts” as defined under the [Securities and Futures Ordinance (SFO)]”.

What is covered by the terms and conditions?

Many of the terms and conditions set out standards and requirements that firms which are licensed by the SFC will recognise and adhere to already, albeit that the focus is on virtual asset funds and virtual asset fund managers. The areas covered include:

  • General principles: these are similar to those in the SFC’s Code of Conduct for Licensed Persons and include, for example, principles on honesty, conflicts of interest, disclosure and senior management responsibility.
  • Organisation and structure: these include requirements to maintain effective compliance, organisation and resources, AML/CTF safeguards, risk management and audit.
  • Fund management: these include requirements around liquidity, operating the fund and managing transactions for the fund and custody (which includes a requirement for the fund managers to assess the most appropriate custodial arrangement for holding the fund’s virtual assets, e.g. independent custodian or self-custody, host locations, use of hot or cold wallets).
  • Dealing with the fund and fund investors: these relate to marketing (for example, only professional investors may invest in virtual asset funds), provision of information to clients and fees, commissions and rebates.
  • Reporting to the SFC: any actual or suspected material non-compliance with the terms and conditions should be reported to the SFC as soon as possible.
What happens if a firm fails to comply?

A failure to comply will be treated as misconduct under the SFO, which will reflect adversely on the fund manager’s fitness and properness, and could result in disciplinary action by the SFC. However, the SFC has said that it will take a pragmatic approach, taking into account all relevant circumstances, including the size of the virtual asset fund manager, and any compensatory measures implemented by its senior management.

What now?

The terms and conditions are already in use by the SFC. Firms are required to inform the SFC if they plan to manage portfolios that involve virtual assets. The SFC will review the plan and if it believes the firm can meet the regulatory expectations, it will impose the terms and conditions on the firm (with any necessary variations). If the firm does not accept those terms and conditions, it will not be permitted to manage portfolios that involve virtual assets.