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The Securities and Futures Commission (SFC) today issued a circular which cautions investors of the risks associated with Bitcoin futures contracts and other cryptocurrency-related investment products (Note 1) and reminds financial service providers of the legal and regulatory requirements when they target customers in Hong Kong.
The circular notes that futures and commodities exchanges in the United States (Note 2) have launched or will soon launch Bitcoin futures contracts which Hong Kong investors may be able to trade through an intermediary. However, dealing in these contracts for investors in Hong Kong and related services, including relaying or routing orders, constitute regulated activities and require a licence from the SFC regardless of whether the business is located in Hong Kong (Note 3).
"Parties routing orders from investors in Hong Kong to trade Bitcoin futures contracts without a relevant licence from the SFC may be committing a criminal offence," said Ms Julia Leung, the SFC’s Executive Director of Intermediaries. "Investors are warned that the risks of high price volatility and illiquidity may be magnified in trading cryptocurrency futures contracts and other related investment products by the speculative nature of the underlying assets, that is, the cryptocurrencies, and the leverage embedded in these products."
Investors are further reminded that client assets have been stolen or misappropriated from cryptocurrency exchanges, some of which have collapsed. Other risks of trading cryptocurrency-related products include insufficient liquidity, high price volatility and potential market manipulation. Investors should carefully weigh these factors against their own risk appetite.
Notes:
- Bitcoin futures contracts offered by a regulated exchange have the conventional features of a “futures contract” which is defined in the Securities and Futures Ordinance (SFO). Even though the underlying assets are not regulated under the SFO, these Bitcoin futures contracts are regarded as "futures contracts" for the purposes of the SFO.
- These exchanges are regulated by the U.S. Commodity Futures Trading Commission and authorised by the SFC to provide automated trading services.
- Unless an exemption applies, parties carrying on a business in dealing in Bitcoin futures contracts, including those who relay or route orders for them, are required to be licensed for Type 2 regulated activity (dealing in futures contracts). Marketing a fund investing in Bitcoin Futures will normally constitute Type 1 regulated activity (dealing in securities) and managing such a fund may constitute Type 9 regulated activity (asset management). Providing advisory services in relation to Bitcoin futures contracts may also constitute Type 5 regulated activity (advising on futures contracts).
