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SFC Issues Reminder on Cryptocurrency-Related Products and Derivatives

On 11 December 2017, the Securities and Futures Commission of Hong Kong (SFC) issued a circular, which reminds financial service providers of the legal and regulatory requirements associated with Bitcoin futures contracts ("Bitcoin Futures") and other cryptocurrency-related investment products. Furthermore, it cautions investors of the underlying investment risks, and investors should carefully weigh them against their own risk appetite.

Licensing and other regulatory requirements in Hong Kong

The circular notes that futures and commodities exchanges in the United States have launched or will soon launch Bitcoin Futures where Hong Kong investors may be able to trade through an intermediary, a member of these exchanges. Bitcoin Futures have the conventional features of a "futures contract," which is defined in the Securities and Futures Ordinance (SFO) to include "a contract or an option on a contract made under the rules or conventions of a futures market." As such, Bitcoin Futures traded on overseas exchanges are subject to the rules of the respective exchanges and are regarded as "futures contracts" for the purposes of the SFO.

The circular sets out the following licensing requirements, which may apply to (i) any party who carries on a business in a "regulated activity" in Hong Kong; and (ii) any party who provides business services relating to Bitcoin Futures which constitute a "regulated activity," irrespective of whether the party is located in Hong Kong, as long as it targets the Hong Kong public:

  • carrying on a business in dealing in Bitcoin Futures, including those who relay or route Bitcoin Futures orders (Type 2 regulated activity—dealing in futures contracts);
  • marketing a fund investing in Bitcoin Futures (Type 1 regulated activity—dealing in securities);
  • managing a fund investing in Bitcoin Futures (Type 9 regulated activity—asset management); and
  • providing advisory services in relation to Bitcoin Futures (Type 5 regulated activity—advising on futures contracts).

Intermediaries are also expected to strictly comply with the suitability requirement and other conduct requirements under the Code of Conduct for Persons Licensed by or Registered with the SFC when providing the above services.

The SFC also reminds the industry that other forms of cryptocurrency-related investment products, including cryptocurrency options, swaps and contracts for differences may, depending on their terms and features, be regarded as "securities" as defined under the SFO. Therefore, parties dealing in, advising on or managing such products in Hong Kong, or targeting such services to investors in Hong Kong, may be subject to the licensing, conduct and authorization requirements under the SFO.

Warning to investors

The circular highlights risks which investors may be exposed to in trading Bitcoin Futures and cryptocurrencies, including insufficient liquidity, high price volatility and potential market manipulation. The SFC warns investors that such risks may be magnified in trading Bitcoin Futures due to the speculative nature of the underlying assets and the leverage embedded in the products. Investors should be aware that, in some cases, the overseas exchanges may operate entirely outside of the SFC's jurisdiction, and some cryptocurrency exchanges have collapsed or been hacked in the past.

The circular is available at:

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