Compliance requirements for licensed corporations (from the Securities and Futures Commission) who invest in Virtual Assets and which are imposed on Virtual Asset Fund Managers. An excerpt of the rules appears below:
These terms and conditions set out the principles and requirements (where applicable) with which corporations licensed by the Securities and Futures Commission (SFC) should comply when managing portfolios (or portions of portfolios) that invest in Virtual Assets (as defined in Section I below) and meet the de minimis threshold (see Section I below). These terms and conditions (Terms and Conditions) shall be imposed on Virtual Asset Fund Managers (as defined in Section I below) by way of a licensing condition. Contravention of a licensing condition is likely to be considered as misconduct under the Securities and Futures Ordinance (Cap. 571) (SFO) which will reflect adversely on the fitness and properness of a Virtual Asset Fund Manager to remain licensed and may result in disciplinary action by the SFC. A pragmatic approach however will be adopted, taking into account all relevant circumstances, including the size of the Virtual Asset Fund Manager, and any compensatory measures implemented by its senior management.
Virtual Assets” means digital representations of value which may be in the form of digital tokens (such as digital currencies, utility tokens or security or asset-backed tokens), any other virtual commodities, crypto assets or other assets of essentially the same nature, irrespective of whether they amount to “securities” or “futures contracts” as defined under the SFO;
A Virtual Asset Fund Manager should select the most appropriate custodial arrangement for holding fund’s Virtual Assets. In assessing which custodial arrangement (or combination of custodial arrangements) to adopt, the Virtual Asset Fund Manager should assess the advantages and disadvantages of holding Virtual Assets under each custodial arrangement (for example, independent custodian or selfcustody, host locations, use of hot or cold wallets) with reference to, among other things,: (a) the ease with which Virtual Assets are accessible, i.e. the time required to transfer the Virtual Assets to the trading venue; and (b) the security of the custodial facility, i.e. whether there are adequate safeguards in place to protect the facility from external threats, including cyberattacks or the ability of the custodian to compensate for any loss of Virtual Assets.
A Virtual Asset Fund Manager should also assess the features and characteristics of the different custodial arrangements. For example: (a) the hardware and software infrastructure; (b) the Virtual Assets which are supported; (c) the security controls over key generation, storage, management and transaction signing; (d) the documented process of handling software upgrades to the storage devices used by the custodians and the Virtual Asset Fund Manager; and (e) the process of handling blockchain forks.