How does the virtual asset trading platform regulatory regime protect investors?

Virtual asset has become the talk of town of late, in particular whether virtual asset trading platforms are regulated and what are the investor protection measures in place. As the new virtual asset trading platform regulatory regime came into effect in June 2023, Mr. Christopher Hui, Secretary for Financial Services and the Treasury and Ms. Elizabeth Wong, Director of Licensing and Head of Fintech unit of the Securities and Futures Commission (SFC) discuss how the new regime protects investors from three perspectives in this video.

The SFC implemented the virtual asset trading platform regulatory regime based on the “same business, same risks, same rules” principle. Under the new regime, virtual asset trading platforms are subject to the same regulatory requirements applicable to traditional financial institutions such as requirements on financial soundness, responsible officers, directors and business operations. To address the specific features and risks of virtual assets, the SFC also implemented additional requirements such as safe custody of client assets, Know-Your-Client processes and anti-money laundering. Moreover, as trading platforms, there are special requirements on cybersecurity, prevention of market manipulative and avoidance of conflict of interest. For example, licensed trading platforms must manage client assets properly, including keeping most of the virtual assets in an “offline wallet” to prevent theft by hackers. Like other financial institutions, virtual assets trading platforms must ensure that client assets are properly segregated from their own assets. The SFC will monitor licensed trading platforms to ensure their operations comply with the regulatory requirements.

The SFC requires licensed trading platforms to have insurance/compensation arrangements in place to provide an appropriate level of coverage for risks associated with the custody of clients’ assets, such as hacking incidents.

The new regulatory regime allows retail investors to trade virtual assets on licensed trading platforms on the premise that the licensed trading platforms have investor protection measures in place to ensure clients’ suitability. These measures include assessment of the client’s knowledge on virtual asset and their risk tolerance to evaluate their risk profile. The platforms are required to set exposure limits for each client based on his / her financial position and personal circumstances to ensure a reasonable level of exposure to virtual assets. Trading platforms are also required to conduct due diligence on the virtual assets being made available for trading to ensure that they meet the token admission criteria, at the same time they need to disclose sufficient product information to help clients assess their investment positions.

Investor should note that while the virtual asset trading platform regulatory regime reduced platform risks, many virtual assets are highly volatile and speculative. They generally do not have any intrinsic value and are not backed by any governments, banks, or physical assets. Virtual assets are high risk products. Investors should only invest in these products if they understand the products and the associated risks. Though licensed virtual asset trading platforms are required to ensure clients’ suitability before providing services, investors are responsible for their own investment decisions. Investors should consider their level of risk tolerance carefully and do their own research before investing in virtual assets.