The Securities and Futures Commission (SFC) wishes to remind 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 in light of their continued prevalence despite previous investor warnings (Note 1) and recent events in the virtual asset industry. 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 (Note 2).
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) (Note 3) 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 (Note 4) 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.
Investors are urged to be wary of the potential high risks associated with VA Arrangements, and if they cannot fully understand them and bear the potential significant or total losses, they should not make an investment.
The SFC also wishes to remind parties engaging in these VA Arrangements that certain arrangements could amount to a CIS as described above.
It is an offence (Note 5) under the SFO for a person to issue an advertisement, invitation or document which is or contains an invitation to the Hong Kong public to acquire an interest in or participate in a CIS, unless the issue has been authorised by the SFC or an exemption applies. Moreover, it is also an offence (Note 6) under the SFO for a person to carry on a business of marketing or distributing interests in a CIS in Hong Kong or targeting Hong Kong investors without an SFC licence unless an exemption applies.
The SFC takes breaches of the SFO seriously and will take robust enforcement action promptly to safeguard investors’ interests.
Investors and parties engaging in VA Arrangements in doubt about the nature and regulatory status of any VA platforms or VA Arrangements are advised to seek professional advice.
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Notes:
The Investor and Financial Education Council (IFEC), a subsidiary of the SFC, has issued a range of investor education materials on VA warning investors of the associated risks, including articles on VA deposits and unregulated VA platforms. For more information, please visit the IFEC’s website: https://www.ifec.org.hk/web/en/financial-products/fintech/ico-bitcoin/index.page
There are many different staking models available in the market, and the rights and obligations of the users and the platform under each staking service arrangement may be different. In some cases, users may deposit their VAs onto the platforms which offer staking services and the platforms may, in return, pay each user the respective staking rewards after a period of time.
Under the SFO, a “CIS” generally has four elements: (i) it must involve an arrangement in respect of property; (ii) participants do not have day-to-day control over the management of the property; (iii) the property is managed as a whole by or on behalf of the person operating the arrangements and/or the contributions of the participants and the profits or income from which payments are made to them are pooled; and (iv) the purpose or effect of the arrangement is for participants to participate in or receive profits, income or other returns from the acquisition or management of the property.
Investors may refer to the Suspected Unauthorised CIS Alert List on the SFC’s website which sets out a list of suspected unauthorised CIS that have come to the SFC’s attention to provide an early warning to investors.
Section 103 of the SFO. The maximum penalties are a fine of $500,000 and three years’ imprisonment plus additional penalties in the case of a continuing offence.
Section 114 of the SFO. The maximum penalties are fine of $5,000,000 and seven years’ imprisonment plus additional penalties in the case of a continuing offence.
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