Securities and Future Commission of Hong Kong (SFC) has issued new regulations for crypto-assets being used in hedge funds.
The regulations were formally announced through a file uploaded on the SFC’s website. These regulations were first put out in November of last year for initial consideration, the regulations are aimed at funds that have invested more than 10% of their active portfolio into cryptocurrency.
The 37-page document is a detailed document that defines virtual assets as “digital representations of value which may be in the form of digital tokens”, such as digital currencies, security tokens. Under the agency’s existing regulations, crypto assets, or other virtual assets also fall under the same category. The law defines them as financial securities and contracts. However, the new regulation only makes slight changes and the majority of the things are already implemented in existing regulations.
The new regulation now puts a minimum requirement of 3 million Hong Kong dollars of capital on the funds to be eligible for investing in Crypto assets. The requirement is similar to the previous requirement to get SFC’s type 9 asset management license.
The law also requires the asset management company to have a compliance officer with them, the duty of the compliance officer would be to draft a compliance strategy for the asset management company. According to the asset management companies are also required to create:
satisfactory internal controls and written compliance procedures which address all applicable legal and regulatory requirements (including its licensing conditions) and implement appropriate monitoring systems;
The document also highlights that the company must appoint a crypto fund manager who would be a third-party custodian of the assets separate from the fund manager. The fiat currency managed by the funds would be only allowed to be kept in designated Hong Kong financial institutions. The document states:
The functions within the Virtual Asset Fund Manager, including fund management, operations, compliance, risk management, valuation, and audit, should only be performed by qualified and experienced persons, who should receive appropriate updates and training on an ongoing basis;
The regulations are designed for security as there have been several security breaches in asset management and trading companies all around the world. These regulations are designed so that investors can be kept safe and monetary loss due to the negligence of the asset management companies can be prevented.
The appointment of the virtual asset manager has been designed to prevent any breach in security and to create a full-proof system with minimal risk. The document states:
A Virtual Asset Fund Manager should ensure that key duties and functions are appropriately segregated, particularly those duties and functions which when performed by the same individual may result in undetected errors, may be susceptible to abuses or may expose the Virtual Asset Fund Manager, its funds or fund investors to inappropriate risks.
The SFC has also issued new guidelines about trading platforms, guiding asset and fund managers to do full due diligence before choosing their trading platform. A proper risk assessment should be done before a trading platform is selected, the virtual asset manager is also put in charge of the selection.