Managing a Cryptocurrency Portfolio – What Licensed Asset Managers Need to Know

Managing a Cryptocurrency Portfolio – What Licensed Asset Managers Need to Know

Managing a Cryptocurrency Portfolio – What Licensed Asset Managers Need to Know 1400 788 Hauzen LLP
What should asset managers do if they want to manage portfolios holding virtual assets?

Increasingly, asset managers are looking to manage portfolios that invest in virtual assets.  Under the regulatory framework of the Securities and Futures Commission (“SFC”), asset management is a regulated activity and requires a Type 9 licence from the SFC.  Specifically, asset management is defined to encompass real estate scheme management, and securities and futures contracts management under the Securities and Futures Ordinance (“SFO”).

Cryptocurrencies such as Bitcoin (“BTC”) or Ethereum (“ETH”) are generally considered to be non-security tokens and fall outside of the definition of “securities”.  In order to address the risks associated with virtual assets, the SFC has started to regulate virtual asset portfolio managers.  This article provides guidance on what an asset manager should do if they want to manage portfolios that invest in virtual assets.

Type 9 licence uplift

If you are an asset manager in Hong Kong and you already hold a SFC Type 9 licence for your securities and/or futures portfolio, you should consider whether a licence uplift is required before you start managing virtual assets.  A licence uplift would be required if you manage or plan to manage portfolios with (i) a stated investment objective of investing in virtual assets; or (ii) an intention to invest 10% or more of the gross asset value (“GAV”) of the portfolio in virtual assets.

Terms and conditions for a Type 9 uplift

An application for a Type 9 uplift is not always straightforward.  The SFC will seek to understand the asset manager’s business activities and apply additional terms and conditions regarding the management of virtual assets.  There will be discussions as to whether any of the terms and conditions proposed by the SFC should be varied based on your business model to the extent reasonable and appropriate.  Your lawyer should be able to guide you through the application process.

Notification requirement

Even if you do not cross the 10% GAV de minimis threshold, you are still required to inform the SFC if you plan to manage one or more portfolios that invest in virtual assets.  This notification requirement applies whether or not the virtual assets you manage amount to securities or futures contracts.  This would capture cryptocurrencies such as BTC and ETH.  Failure to inform the SFC could result in a breach of your regulatory obligations.

Please contact us if you wish to find out more about cryptocurrency regulation.

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