Hong Kong Regulator Calls out Risks Relating to Virtual Assets

The Securities and Futures Commission (SFC) reminds investors of the risks associated with virtual asset (VA) platforms offering VA "deposits", "savings", "earnings" or "staking" services (VA Arrangements) to investors in Hong Kong.

The SFC also takes this opportunity to remind the industry of the potential legal requirements when they offer VA Arrangements to investors in Hong Kong.

The SFC has observed that some of these platforms may offer a high "interest rate" on VA "deposits" or a daily generation of additional VA at a guaranteed or fixed rate to investors. The VA deposited by investors with the platform may then be on-lent by the platform to borrowers on other platforms or decentralised lending protocols or used in investment or other activities. Some platforms may also offer staking services to investors where investors' VA may be delegated to a staking pool to earn staking rewards for investors

The SFC wishes to remind investors of the significant risks associated with investing in these types of VA Arrangements. Investors may suffer significant or even total loss, especially in the event of fraud or collapse of a VA platform as evident in the recent fallout of a number of VA platforms.

• ​Whilst some VA Arrangements are commonly labelled or marketed as "deposits" or "savings" products, they are not regulated and are not the same as bank deposits. Investors are not afforded with any form of protection.

• ​A vast majority of VA platforms offering VA Arrangements are unregulated. There may be a lack of transparency in their operations. Their fitness and properness, including their financial soundness and competence, are not subject to any regulation, such as prudential regulation. Particularly, if a VA platform or the counterparty to which the VA deposited by investors are on-lent ceases operation, collapses, or is hacked or exposed to fraud, investors may not be able to get back their VA from their accounts and may risk losing their entire investment held on the platform.

• ​VA are exposed to heightened risks including insufficient liquidity, high price volatility, opaque pricing, potential market manipulation, hacking and fraud and may lose all value.

• ​Some VA Arrangements could amount to a collective investment scheme (CIS) as defined under the Securities and Futures Ordinance (SFO) if the participating investors do not have day-to-day control over the management of their VA and the VA are pooled and/or managed as a whole by the operator to generate returns for investors. Such VA Arrangements may be unauthorised CIS and may be highly risky. The product will not have been vetted nor its offer and marketing materials reviewed by the SFC. Investors will have no protection under the SFO.