25 April, 2024

Hong Kong Securities and Futures Commission Warns of High Risks Associated With Virtual Assets

14 Dec, 2022

22 Nov, 2023

In light of the FTX debacle, the Hong Kong Securities and Futures Commission (SFC) is drafting regulatory requirements for local licenced crypto exchanges. The commission warned that there are currently many unregulated cryptocurrency savings, earnings, or staking services.

“Investors are urged to be wary of the potential high risks” associated with so-called “virtual asset arrangements,” according to a statement from the Securities and Futures Commission (SFC).

Whilst some VA [virtual asset] Arrangements are commonly labelled or marketed as ‘deposits’ or ‘savings’ products, they are not regulated and are not the same as bank deposits. Investors are not afforded with any form of protection,the SFC added.

It noted that given the recent fallout from problems encountered by a number of platforms, awareness of the risk of potential losses in the event of fraud and collapse of virtual asset platforms is especially important.

The amendment to the Virtual Assets Service Providers licencing regime is aimed at preventing cryptocurrency use for money laundering and terrorism financing, as well as effectively protecting retail investors and their assets on a cryptocurrency exchange.

According to the SFC, Hong Kong has adopted a comprehensive supervision approach concerning digital asset service providers, whereas other jurisdictions prefer softer standards. This can include separating client assets and submitting audited financial reports and accounts on a regular basis.

The SFC also reminded virtual asset product marketers that investment schemes in which participating investors do not have day-to-day control of the assets and the assets are pooled and managed by the operator may be considered a collective investment scheme.

Unless the issue has been authorised by the SFC or an exemption applies, issuing an advertisement or inviting the public to participate in a collective investment scheme is an offence under Hong Kong law.

Sam Bankman-Fried, the founder of the failed cryptocurrency exchange FTX, was arrested in The Bahamas on Monday.

However, the failure of FTX did not deter authorities from attempting to embrace the industry. In December, Hong Kong’s Legislative Council amended the licencing regime for virtual asset service providers, requiring a licence to conduct crypto business in Hong Kong beginning in June 2023.

Hong Kong’s Financial Secretary Paul Chan stated in November, just three days after FTX filed for Chapter 11 bankruptcy, that the region still welcomes the crypto industry and values its innovative features.



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