Clifford Chance

Hong Kong announced several fundamental virtual asset-friendly changes to the city's regulatory stance towards virtual assets, including the relaxation of rules surrounding retail access.

The Hong Kong Government issued a policy statement on 31 October 2022 in conjunction with the city's flagship Hong Kong Fintech Week conference, which unveiled several key changes to the city's regulatory stance towards virtual assets (VA), in particular allowing retail access to VA futures ETFs, and launching consultation on the degree of retail access to VA, among other updates.

VA futures ETFs

The new policy would enable retail investors to access VA futures ETFs to be listed on the Hong Kong Stock Exchange, subject to the below requirements as outlined in the SFC's circular:

• Eligible underlying VA futures: initially with Bitcoin and Ether futures traded on Chicago Mercantile Exchange.
• Management company: to have a good track record of regulatory compliance and at least three years’ proven track record in managing ETFs.
• Investment strategy: adopt an active investment strategy with net derivative exposure capped at 100% of the ETF's total net asset value.
• Investor education: the offering documents to include appropriate risk disclosures, and the management company to conduct investor education.
• Distribution: intermediaries to comply with existing conduct requirements for derivatives and VA-related products.

Companies will be expected to comply with the above together with existing SFC regulations surrounding ETFs. Wider engagement and discussions are expected among different  stakeholders to capture this opportunity including managers, custodians/trustees, participating dealers, market makers, and brokers.

Retail VA trading

Currently, VA products traded on SFC licensed exchanges are only available to professional investors. A new licensing regime under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance is under way to implementation in early 2023 under which VA exchanges involving non-security VA will also be required to be licensed. The relaxation of the VA rules would permit retail virtual asset trading for SFC licensed exchanges.

The SFC is undergoing soft consultation with the industry and will also consult the public to allow retail investors to access VA on licensed exchanges.

Other developments

Other exciting regulatory updates and pilot projects include:

• Security tokens: The SFC clarified that tokenised securities will not be blanket classified as "complex product" (and hence subject to additional suitability requirements) merely because it is traded on a blockchain, if it has similar terms, features and risks as traditional securities. The SFC is expected to set out a detailed modified security token regime in due course.
• Green bond tokenisation: The Government is considering tokenising Government Green bond issuance for subscription by Hong Kong investors to test the use of distributed ledger technology in the bond lifecycle.
• e-HKD: The Government is exploring the launch of e-HKD, Hong Kong's retail central banking digital currency.

The developments are a welcome change to the industry and solidifies Hong Kong position as a regional VA hub. In recent years, the SFC has progressively built a VA regulatory ecosystem, including recent regulations governing the activities of VA fund managers and VA intermediaries, and the announcement of the VA exchange licensing regime expected to be effective in early 2023. The comprehensive legal framework, regulatory certainty, and positive regulatory attitude towards VA is expected to set Hong Kong apart from other key jurisdictions in the region.