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Hong Kong regulators roll out new investor protection guidelines

Following a new legal regime for digital currencies in Hong Kong, the region’s Securities and Futures Commission (SFC) has launched new rules to strengthen existing provisions for protecting investors.

The rules, rolled out in concert with the Hong Kong Monetary Authority (HKMA), apply to intermediaries keen on offering digital currency services to retail consumers. Both agencies announced the rule changes via a joint circular, affecting intermediaries’ distribution of digital asset-related products.

Per the circular, intermediaries are banned from offering complex products to retail investors, with the rule describing an overseas digital asset non-derivative ETF as a complex product. However, the rules make exceptions for exchange-traded digital asset derivative funds and public futures-based VA ETFs approved by regulators in a designated jurisdiction or traded on the Stock Exchange of Hong Kong Limited.

There is also a requirement for intermediaries to gauge the knowledge of retail investors before processing any digital currency transactions on their behalf. If the investor lacks the required knowledge, intermediaries can provide training before processing a digital currency transaction while paying keen attention to the financial position of investors.

“Where an intermediary provides financial accommodation to a client, it should assure itself the client has the financial capacity to meet the obligations arising from leveraged or margin trading in VA-related products, including in a worst-case scenario,” read the circular.

Both the SFC and the HKMA say the new rules for intermediaries are necessary in light of new changes in regulation. In August, the SFC allowed retail investors to dabble in digital currencies on authorized exchanges after a lengthy ban, raising new questions about the role of intermediaries in the space.

“The policy is updated in light of the latest market developments and enquiries from the industry seeking to further expand retail access through intermediaries and to allow investors to directly deposit and withdraw virtual assets to/from intermediaries with appropriate safeguards,” according to the joint circular.

The agencies pointed to the uneven state of global regulation as a reason for heightened attention from industry players. Per the statement, a lack of uniform rules could lay the foundations for market manipulation and lack of pricing transparency, which could trigger losses for investors akin to FTX’s and Terra’s implosions.

Web3 paradise in the making

Hong Kong’s new rules come on the heels of the government’s ambitious plans to transform the region into a Web 3 paradise. Establishing a robust legal framework early in the year set the ball rolling for Hong Kong. Still, the launch of government incentives has seen several firms angling to seek approvals to launch their operations.

The government has since assured intending firms of non-restrictive banking services, low tax burdens, a deep talent pool, and several incubation hubs to foster innovation and growth. Currently, over 80 Web3 and fintech firms are setting up shop in Hong Kong, spending millions of dollars to achieve compliance.

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