David Cheng, Partner, Hong Kong Office, Winston & Strawn, overviews the latest guidance for intermediaries dealing in VA-related products and services, and clarifies the new measures and requirements pertaining to Hong Kong’s virtual asset market.

The VA landscape in Hong Kong has evolved rapidly in recent years, with a broader range of VA-related products available in the market. For example, certain high-profile cryptocurrency exchange-traded funds (ETFs), such as a Bitcoin ETF from Canada and a Bitcoin futures ETF from the US, were for some time available to retail investors on certain trading platforms that operate in Hong Kong.

On 28 January 2022, the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) published a joint circular (the Circular) that supersedes a previous SFC circular in 2018 on the distribution of VA funds (the 2018 Circular). The Circular covers a range of VA-related activities, including the distribution of VA-related products, the provision of VA-dealing services and the provision of VA-advisory services.

Distribution of VA-related products

While recognising that the spot market for virtual assets is largely unregulated at present, the SFC and the HKMA consider certain investor protection measures should be imposed on the trading of VA-related products, which refer to investment products that (a) have a principal investment objective or strategy to invest in virtual assets, (b) derive their value principally from the value and characteristics of virtual assets, or (c) track or replicate the investment results or returns that closely match or correspond to virtual assets.

Intermediaries distributing VA-related products should take all following applicable measures for investor protection:

  1. Professional investors only. While intermediaries may offer non-complex derivative VA-related products to retail investors, they should offer other VA-related products to professional investors only.
  2. Virtual asset knowledge test. Intermediaries should assess whether their clients have knowledge of investing in virtual assets and VA-related products before effecting a transaction on their behalf, unless the client is an institutional professional investor or qualified corporate professional investor. Intermediaries should also ensure that their clients have sufficient net worth to afford to assume the risk and bear the potential loss associated with trading VA-related products.
  3. Suitability. Intermediaries should observe their obligations set out in the SFC’s suitability requirement FAQs (namely, on Compliance with Suitability Obligations by Licensed or Registered Persons and on Triggering of Suitability Obligations), including the know your customer (KYC) procedures, understanding of the investment products they recommend, competent staff and sufficient training, just to name a few. Intermediaries should also conduct proper due diligence on the product, including, for example, understanding the risks and features of the underlying virtual assets, the targeted investors and the product’s regulatory status.
  4. Financial accommodation. Intermediaries should not provide clients with financial accommodation for investing in VA-related products, unless they have satisfied themselves that the client has the financial capacity to meet the obligations arising from leveraged or margin trading in VA-related products.
  5. Disclosure. Intermediaries should provide to clients, in a clear and easily comprehensible manner, information about VA-related products and warning statements specific to virtual assets. The Circular has given some examples of such warning statements in Appendix 5.
  6. Prohibition of unauthorised investments. Some VA-related products are not permitted to be offered to retail investors because of restrictions specific to some jurisdictions or exchanges. Intermediaries should not offer to the public any investments that have not been authorised by the SFC, and should ensure online platforms that distribute VA-related products are properly designed to comply with those selling restrictions, so that only investors in the appropriate jurisdictions can gain access to their platforms.
  7. Complex product requirements. The SFC has published a non-exhaustive list of examples of non-complex and complex products (Non-Complex and Complex Product List), where some VA-related products may be determined to be complex products. Intermediaries distributing complex VA-related products should follow the complex product requirements.
  8. Derivative product requirements. Certain VA-related products are considered derivative products. Intermediaries distributing such derivative VA-related products should ensure that the client understands the nature and risks of the products and has sufficient net worth to be able to assume the risks and bear the potential losses of trading in the products.

In relation to points 7 and 8 above, the Circular discusses investor protection measures specific to the following three classes of products:

  1. Nonderivative products. Nonderivative VA-related products are very likely to be considered complex products and should therefore comply with the complex product requirements.
  2. Non-complex derivative products. VA-related derivative products that are either traded on a specified exchange, or funds approved for retail investors by the regulator in a designated jurisdiction, are generally not considered complex products, unless they are determined to be ‘complex’ according to the Non-Complex and Complex Product List. When distributing such non-complex derivative products, intermediaries should follow the derivative product requirements. As discussed above, there is no ‘professional investor only’ restriction for non-complex derivative products.
  3. Complex derivative products. Complex derivative products include (a) unlisted VA derivatives, (b) VA derivatives listed on a non-specified exchange, (c) VA funds that are not approved for retail investors in any designated jurisdiction, and (d) other VA derivatives determined to be complex under the Non-Complex and Complex Product List. For these complex derivative products, both the complex product requirements and the derivative product requirements apply.

Provision of VA-dealing services

Intermediaries must be licensed or registered for Type 1 regulated activity to provide VA-dealing services to existing clients of Type 1 services only. According to the Circular, intermediaries should also note and comply with the following requirements in the provision of VA-dealing services:

  • SFC-licensed VA trading platforms only: The majority of VA trading platforms are unregulated or regulated for anti–money laundering and counter–terrorist financing purposes only. Intermediaries that provide VA-dealing services should partner with SFC-licensed VA trading platforms only.
  • Fitness and properness: Non-security virtual assets fall outside the SFC’s jurisdiction; however, VA-dealing services that involve the trading of non-security virtual assets may affect an intermediary’s fitness and properness to stay licensed or registered to conduct regulated activities. Therefore, intermediaries are expected to comply with all the regulatory requirements imposed by the SFC and the HKMA when providing VA-dealing services, whether or not the virtual assets involved are securities.
  • Introducing agent services: Where intermediaries act as introducing agents, they should introduce professional investors to SFC-licensed platforms only and should not relay orders on behalf of their clients to the platforms or hold any client assets (fiat currencies or virtual assets) for the introducing services.
  • Omnibus-account arrangement: Intermediaries providing VA-dealing services under an omnibus-account arrangement are expected to follow the SFC’s licensing or registration conditions, including the terms and conditions set out under Appendix 6 to the Circular such as excess liquid capital, written client agreement and record-keeping requirements, among others.
  • Discretionary account management services: There is a de minimis threshold for intermediaries providing discretionary account management services, subject to additional requirements set out in the Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets, published by the SFC in October 2019. Where a Type-1 intermediary is authorised by its clients to provide VA-dealing services on a discretionary basis as an ancillary service, the intermediary should invest less than 10% of the gross asset value of the client’s portfolio in virtual assets.

Provision of VA-advisory services

Currently, only Type 1 or Type 4 intermediaries are allowed to provide VA-advisory services. Again, such VA-advisory services should be provided to intermediaries’ existing clients to whom they provide services in Type 1 or Type 4 regulated activities only. Intermediaries providing VA-advisory services should observe the same requirements listed in the section above on the distribution of VA-related products. In addition, they should also ensure they meet the requirements of fitness and properness, knowledge test and conduct as set out in the Terms and Conditions.


There will be a six-month transition period before the full implementation of the expected requirements in the Circular for intermediaries already engaging in VA-related activities to revise their systems and controls in accordance with such requirements. Intermediaries that do not currently engage in any of the above VA-related activities but intend to do so should notify the SFC in advance and ensure they comply with all the requirements before introducing such services.


The Circular represents the continuing efforts of the SFC and the HKMA to regulate the virtual asset market in Hong Kong. According to the new requirements, intermediaries, such as online brokerages and trading platforms, should restrict retail investors’ access to the VA-related products that are open to professional investors only. This means certain popular cryptocurrency ETFs, Bitcoin futures ETFs, or other cryptocurrency funds will no longer be available to retail investors in Hong Kong.

On the other hand, intermediaries providing VA-dealing and VA-advisory services can partner with VA-trading platforms that are licensed by the SFC only. This could indicate that the SFC, which granted its first license to a VA-trading platform in December 2020, may license more VA-trading platforms that are eligible.

Even though, at present, non-security virtual assets fall outside the SFC’s jurisdiction, the Circular shows further steps to regulate the trading of non-security virtual assets in the context of VA-dealing services, which is in keeping with the proposal by the Financial Services and the Treasury Bureau back in May 2021 of an SFC-licensing regime for virtual asset service providers in Hong Kong.

David Cheng, Partner, Hong Kong Office

Winston & Strawn

© Copyright March 2022 Winston & Strawn LLP