On 11 December 2017, the Securities and Futures Commission (SFC) published a circular to remind the industry of the regulatory obligations arising from providing financial services relating to Bitcoin futures contracts (Bitcoin Futures) and other cryptocurrency-related products and also to warn investors about the risks associated with such products.
Certain well-established U.S. futures and commodities exchanges regulated by the U.S. Commodity Futures Trading Commission which have been authorised by the SFC to provide automatic trading services in Hong Kong have launched or will soon launch Bitcoin Futures trading services and Hong Kong investors can trade Bitcoin Futures through intermediaries which are members of these U.S. exchanges.
SFC regulatory obligations
Bitcoin Futures are regarded as “futures contracts” under the Securities and Futures Ordinance (SFO), even though their underlying assets may not be regulated under the SFO. Accordingly engaging in investment activities or providing investment services in relation to Bitcoin Futures which are targeted at Hong Kong investors without SFC licence or authorisation may constitute a criminal offence under the SFO irrespective of whether the service provider is located in or outside Hong Kong.
- Dealing in Bitcoin Futures, including routing Bitcoin Futures orders, requires a licence for Type 2 regulated activity (dealing in futures contracts). SFC regulated entities should not directly route Bitcoin Futures orders to an exchange which is not authorised by the SFC to provide automatic trading services in Hong Kong. They should also comply with the related conduct requirements such as the suitability requirements under paragraph 5.2 and requirements for providing services in derivative products under paragraphs 5.1A and 5.3 of the Code of Conduct for Persons Licensed by or Registered with the SFC.
- Marketing a fund investing in Bitcoin Futures requires a licence for Type 1 regulated activity (dealing in securities).
- Managing a fund investing in Bitcoin Futures requires a licence for Type 9 regulated activity (asset management).
- Advising on Bitcoin Futures requires a licence for Type 5 regulated activity (advising on futures contracts).
- Other cryptocurrency-related products such as cryptocurrency swaps, options and contracts for differences are being offered to Hong Kong investors. Depending on the features of those products, they may also be regarded as “securities” under the SFO. Therefore, relevant licensing, securities offering, authorisation and conduct requirements under the SFO may also arise from offering, dealing in, advising on or managing these products in Hong Kong.
Associated investment risks
The SFC’s circular contains stern warnings to investors of the risks of dealing with unregulated exchanges, products or intermediaries, as well as particular risks associated with Bitcoin Futures, such as the speculative nature of cryptocurrencies, price volatility, liquidity, leverage and potential for price manipulation.