ALB Analysis: Huobi’s virtual asset management license in Hong Kong shows city is becoming a hub for Chinese cryptocurrency companies
Huobi Asset Management, the Hong Kong-based subsidiary of Chinese blockchain technology services provider Huobi Technology Holdings, recently received approval from the city’s Securities and Futures Commission to manage virtual asset funds.
The grant of the license makes Huobi Asset Management the second licensed virtual asset manager in Hong Kong since October 2019. It is also the first licensed virtual asset fund manager approved by the SFC to issue virtual asset funds with an active investment strategy. Using this license, Huobi Asset Management plans to launch three virtual asset funds: BTC Tracker Fund, ETH Tracker Fund, and Multi-strategy Virtual Asset Fund.
The license is significant for two main reasons. First, it allows Huobi Asset Management to offer fully regulated crypto funds, enabling easier and reliable access to this alternative asset class for the Asian institutional market. “Distributors have been keen to get in touch with us, the feedback we have received is that products like this are still quite rare in the Asian market,” said Gillian Wu, CEO of Huobi Asset Management. But more importantly, it establishes Hong Kong as a fast-growing home for Chinese cryptocurrency firms.
Hong Kong building fast lane for virtual assets
Lawyers and other industry experts see this as a trend that is here to stay. “The decision by Huobi to become regulated in Hong Kong reinforces Hong Kong’s position as an international asset management hub, which the Hong Kong government has been working very hard to bolster in recent times with various reforms including changes that make Hong Kong domiciled fund vehicles easier to use and significant tax concessions,” says Joy Lam, the Sidley Austin partner who led the team advising Huobi on its SFC license.
Lam has found that the license has become a catalyst for other asset managers in Hong Kong to reflect on their own business plans. “Following Huobi’s announcement, we have already been contacted by a significant number of other asset managers who are keen to explore seeking the same approval,” she says. “In the short to medium term, we can expect to see more asset managers authorized by the SFC to manage 100% virtual asset portfolios, as investor demand for this kind of product grows.”
Another advantage of Hong Kong is the SFC’s recruitment of highly skilled personnel. “The SFC has invested in developing a small team of “very commercial, sharp, fintech-dedicated licensing officers,” says Lam, who adds that it is benefiting the industry. “The Hong Kong regulator has been carefully crafting the regulatory framework, trying to ensure adequate investor protection without stifling innovation in the financial services industry,” she adds noting that Huobi’s decision to become regulated in Hong Kong validates its position as a hub.
Needed: More players, clearer rules
While Hong Kong’s prospects in the virtual-asset space look bright, there are still some gaps to be filled from a regulatory standpoint. Lam points out two main areas, with the first being access for retail investors. “Currently, access to virtual assets funds managed by SFC licensed fund managers and trading on SFC licensed virtual assets exchanges is limited to professional investors only,” she says. “This means that retail investors in Hong Kong cannot access these products or services from licensed operators – instead, retail investors are limited to unregulated products and unregulated exchanges only, which arguably carry more risk.” That said, there is a proposal currently under consideration to introduce licensing requirements for virtual assets exchanges operating in Hong Kong that trade non-security virtual assets only and
it remains to be seen whether this will also limit access to professional investors only, Lam adds.
The second involves clarifying requirements for distribution. “Distribution has been a significant bottleneck in Hong Kong for tokenized securities (including tokenized funds which are becoming increasingly popular) and other digital offerings.” Lam says. She adds that there are neither security tokens trading on the licensed exchanges in Hong Kong, nor any standardized process or clear criteria established by the SFC for approving security tokens to be listed.
In this context, Lam points out that the ecosystem in Hong Kong needs several distributors who are appropriately licensed to assist with the distribution of virtual assets including securities. The ecosystem also needs clarity on what the requirements are for tokens to be approved for listing on Hong Kong licensed exchanges. “Lacking either of these could be a significant deterrent to issuers and service providers who may otherwise consider Hong Kong as a base of operations.” Lam says.