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21 Dec 2017

Bitcoin Futures – the SFC outlines the regulatory requirements and risks associated with cryptocurrency-related investment products

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The Securities and Futures Commission (the “SFC”) released a circular on 11 December 2017 (the “Circular”), outlining the legal and regulatory requirements of providing financial services in relation to Bitcoin futures contracts (“Bitcoin Futures”) and other cryptocurrency-related investment products to investors in Hong Kong.

With the launch of Bitcoin Futures trading by two U.S. exchanges, Cboe Futures Exchange LLC and Chicago Mercantile Exchange Inc., Hong Kong investors will be able to trade in these futures contracts through an SFC-authorised intermediary that is permitted to relay or route orders to these exchanges. 

The SFC stressed that Bitcoin Futures are likely to fall under the definition of “futures contract” under the Securities and Futures Ordinance (the “SFO”), notwithstanding that its underlying asset (i.e. Bitcoin) is not currently SFO-regulated. Accordingly, any person that:

  • markets a fund investing in Bitcoin Futures;
  • manages a Bitcoin Futures fund;
  • deals in Bitcoin Futures (such as relaying or routing Bitcoin Futures orders);
  • advises on Bitcoin Futures; or
  • deals in, advises on or manages other cryptocurrency-related investment products that may be considered as “securities” under the SFO, may be required to obtain the appropriate licence(s) from the SFC.

The SFC did not stop short to remind intermediaries of (1) the suitability requirement under paragraph 5.2 of the Code of Conduct whenever it makes recommendations or solicitations to its clients and (2) the conduct requirements in relation to derivative products (i.e. Bitcoin Futures) under paragraphs 5.1A and 5.3 of the Code of Conduct, namely to assess the client’s knowledge in these products and to ensure their understanding of the nature and risks of such products. 

Lastly, the SFC also reminded investors of the dangers of trading in cryptocurrency futures contracts and other cryptocurrency-related investment products, including the speculative nature of cryptocurrencies and the possibility of collapse and/or hacking of cryptocurrency exchanges. 

Our take

In September, the SFC issued guidance on how digital tokens issued via initial coin offerings (“ICOs”), may fall under the definition of “securities” under the SFO. Together with the release of the Circular, the SFC is and will be taking a cautious and “wait-and-see” approach regarding activities surrounding ICOs, Bitcoin Futures and other cryptocurrency-related investment products. The take-home messages from the SFC so far are:

  • such activities need to be considered under the existing regulatory framework in Hong Kong, and may be subject to the business licensing and product authorisation regime under the SFO; and
  • intermediaries should assure itself that its clients are aware of the nature and risks of cryptocurrency-related investment products and that such products may not be suitable for all clients.
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