Hong Kong Issues New Crypto Rules Allowing Staking Services

Trusted Editorial content, reviewed by leading industry experts and seasoned editors. Ad Disclosure Hong Kong’s Securities and Futures Commission (SFC) has issued guidelines to allow crypto platforms and funds in the jurisdiction to offer staking services. The new rules are part of the regulator’s roadmap to develop Hong Kong’s digital assets ecosystem.

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On Monday, Hong Kong’s SFC announced a new set of rules to provide regulatory guidance to licensed Virtual Asset Trading Platforms (VATPs) and SFC-authorized funds exposed to Virtual Assets (VA Funds) seeking to offer staking services.

With the new guidelines, the regulatory agency “recognizes the potential benefits of staking in enhancing the security of blockchain networks and allowing investors to earn yields on virtual assets within a regulated market environment,” the statement reads.

SFC’s Chief Executive Officer, Julia Leung, considers that “broadening the suite of regulated services and products is crucial to sustain the healthy advancement of Hong Kong’s virtual asset ecosystem,” adding that, “the broadening must be done in a regulated environment where the safety of client virtual assets continues to be front and center of the compliance framework for offering such service.”

These rules allow crypto platforms to expand product and service offerings, one of the five pillars in the SFC’s “ASPIRe” roadmap announced in February to develop Hong Kong’s virtual asset ecosystem.

According to the circulars, crypto exchanges and funds wanting to offer staking services to their clients must receive written approval beforehand and ensure they meet the requirements set by the SFC, including internal control, proper disclosure of information, and due diligence regarding blockchain protocol selection and third-party service providers.

New Guidelines For Exchanges And Authorized Funds

Crypto platforms offering staking services must maintain possession or control of all staked assets, as delegating custody to third parties is prohibited. Additionally, they should have policies to ensure clients’ crypto assets are adequately safeguarded and report their staling activities periodically to the SFC.

The rules mandate that VATPs disclose all relevant information to their customers, including slashing, lock-up, technical error and hacking risks, fees, charges, minimum lock-up periods, unstaking process details, measures for outages and business resumption, and custodial arrangements.

The platforms offering staking services must perform due diligence when including a blockchain protocol and conduct ongoing monitoring when outsourcing to third-party service providers.

It must perform all reasonable due diligence and ensure that its internal controls and systems, technology, and infrastructure can support the provision of Staking Services in that blockchain protocol and manage any risks arising from it.

Meanwhile, SFC-approved crypto funds with more than 10% of their net asset value invested directly or indirectly in virtual assets can engage in staking if it is consistent with the VA fund’s objectives and strategy.

The circular mandates that funds can only invest directly or indirectly in crypto through licensed VATPs or authorized financial institutions (AI) and should not have leveraged exposure to digital assets at the fund level.

Moreover, the management company must implement robust internal controls to manage the potential risks and conflicts of interest that may arise, perform due diligence, and continuously monitor the service providers used for these activities.

Lastly, the SFC noted it may introduce additional requirements or conditions “as deemed necessary or appropriate in the discharge of its functions.”

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