Recent Updates to HKSI Paper 1 Version 3.4.1 Manual– Fundamentals of Securities and Futures Regulation

The following updates are examinable from 1 March 2024

TOPIC 1 – REGULATORY OVERVIEW OF THE HONG KONG FINANCIAL INDUSTRY

• Minor updates to reflect changes in AMLO and recognition of Virtual Asset Exchanges

TOPIC 2 – PRINCIPLES OF RELEVANT HONG KONG LAW AND THE COMPANIES ORDINANCE

• No updates

TOPIC 3 – SECURITIES AND FUTURES ORDINANCE

• Minor updates to reflect changes in AMLO and recognition of Virtual Asset Exchanges

TOPIC 4 – LICENSING AND REGISTRATION, AND SUBSIDIARY LEGISLATION

• No updates

 TOPIC 5 – BUSINESS CONDUCT AND CLIENT RELATIONS

• Minor updates to reflect changes in AMLO and recognition of Virtual Asset Exchanges

 TOPIC 6 –BUSINESS OPERATIONS AND PRACTICES

• The anti-money laundering provisions that apply to licensed corporations now also apply to virtual asset service providers and this is now reflected in the materials

Virtual Assets

• The GAML explains how its requirements apply to virtual asset transactions and activities
• Virtual assets give rise to particular risks associated with money laundering:
  • Ease of cross border activity
  • Speed at which multiple transactions can be executed
  • Involvement of unregulated businesses in other jurisdictions
  • Potential use of anonymity-enhancing services
• Accordingly, there are additional risk considerations:
  • Regulatory treatment of virtual assets in other jurisdictions
  • Nature of a particular virtual asset
  • Market characteristics of the virtual asset
  • Whether virtual asset is transacted on a public or private blockchain

TOPIC 7 –PARTICIPATING IN THE HONG KONG EXCHANGES

• No updates

TOPIC 8 –ACCESSING PUBLIC CAPITAL

• Additional material on Virtual Assets

Virtual Assets

Introduction

• Since the first Bitcoin was issued in January 2009, a wide range of different types of virtual assets have been issued, based on some form of blockchain or distributed ledger technology
• Billions of dollars have been invested in virtual assets, in primary market capital raisings and in subsequent secondary market activity, frequently in the absence of the usual regulatory oversight mechanisms that are normally in place in traditional markets
• The resulting significant investor protection risks have required regulatory agencies globally to consider how such virtual assets and related activities, should be treated under current laws and regulations
• Under the approach taken in Hong Kong, a virtual asset that is a cryptographically secured digital representation of value will be regulated under either:
  • The SFO where the virtual asset constitutes a securities or futures contract, as defined in the SFO (central bank digital currencies are excluded); or
  • The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), where the virtual asset does not fall under the SFO

Regulation by the SFO

• A virtual asset will be considered to be a security under the SFO if:
  • It might represent equity or ownership interests in a corporation
  • It might represent a debt or liability
  • It might have proceeds managed on a collective basis as a CIS

Regulation by the AMLO

• Virtual assets will be regulated by the AMLO if they:
  • Are expressed as a unit of account or a store of economic value
  • Can be used as a medium of exchange
  • Can be transferred, stored or traded electronically
  • Satisfy characteristics as prescribed by the SFC
• Any person operating an exchange, trading virtual assets falling under the above definition, will need to be licensed by the SFC under AMLO provisions
• Under the AMLO, a virtual asset exchange means an entity providing services through electronic facilities
  • that offers to sell/purchase virtual assets which can be made binding; or
  • that enables persons to negotiate or conclude sales or purchases of virtual assets in a way that forms a binding transaction

Dual Licensing Regime for Platforms

• Platforms that trade virtual assets must be licensed according to the nature of the virtual assets traded on the platform:
  • A platform that trades one or more virtual assets that constitutes securities under the SFO will need to be licensed/registered under the SFO, typically for Type 1 and Type 7 regulated activities
  • A platform that trades one or more virtual assets that are not securities under the SFO and meet the definition of virtual assets under the AMLO will need to be licensed under the AMLO
  • A platform that engages in both trading activities will need to be licensed under both the SFO and the AMLO

Regulated Activities Under the SFO

• • Where an investment portfolio is structured as a CIS, activities in relation to the CIS’s shares or units will be subject to the SFO even though the underlying assets consist solely of virtual assets that are neither securities nor futures
  • For futures contracts on virtual assets, dealing and advising are covered by regulated activities 2 and 5
  • Licensed corporations/registered institutions who provide virtual asset services to their clients must partner with SFC licensed virtual asset trading platforms and must be type 1 licensed
  • Any plan to start providing trading or asset management services involving virtual assets will require a significant change in activities notification to the SFC

TOPIC 9 –MARKET MISCONDUCT AND IMPROPER TRADINGPRACTICES

• No updates