Hong Kong's Securities and Futures Commission (SFC) has issued regulations for fund managers investing in "virtual assets."

In an Oct. 4 announcement, the financial market watchdog formalized a framework put out in November last year that was aimed to regulate funds that allocate more than 10 percent of their portfolio in virtual assets.

The 37-page regulation, which is effective immediately, defines virtual assets as "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.

It also includes any other virtual commodities, crypto assets or other assets of essentially the same nature, regardless of whether they fall under the definition of  “securities” or “futures contracts” under the agency's existing ordinance.

Other than that, the document is fairly broad, as much of it follows existing regulations on fund-managers licensed by the SFC in general.

For instance, fund managers investing in crypto assets must have at least 3 million Hong Kong dollars ($382,000) of capital, similar to the minimal requirement for the SFC's type 9 (asset management) licensees. An independent compliance officer needs to be appointed, and detailed compliance procedures must be drafted.

Crypto fund managers must appoint a third-party custodian and the assets of the fund and the fund manager must be kept separate. Fiat currency must also be kept separate at a licensed Hong Kong financial institution or in a jurisdiction approved by the SFC.

When choosing a custodian, the fund manager must establish that the institution is capable of dealing with virtual assets and that it understands relevant concepts, such as wallets. The SFC does allow for self-custody if certain requirements are met.

In terms of trading, the SFC requires fund managers to conduct extensive due diligence on crypto exchanges before using any virtual asset trading platform.

Hong Kong currency image via Shutterstock