Hong Kong Regulator Warns Investors of Unregulated Bitcoin Futures

Hong Kong’s securities regulator has published a new circular centered on bitcoin futures contracts and cryptocurrency-related investment products.

Published yesterday, the circular from Hong Kong’s Securities and Futures Commission (SFC) quickly reminded providers of bitcoin futures contracts and other crypto-investment products to comply with legal and regulatory requirements. The timing of the circular is no coincidence, on a day when Chicago-based CBOE began trading its futures contract after its launch on Sunday.

“Bitcoin Futures have been or will soon be launched by certain well-established futures and commodities exchanges in the United States which are regulated by the U.S. Commodity Futures Trading Commission and authorised by the Securities and Futures Commission (“SFC”) to provide automated trading services,” the Hong Kong regulator wrote.

Notably, the regulator added:

Hong Kong investors may be able to trade in Bitcoin Futures through an intermediary which is a member of these exchanges.

Any parties or intermediaries providing services related to Bitcoin Futures are required to “have an appropriate license with the SFC…irrespective of whether the party is located in Hong Kong, so long as its business activities target the Hong Kong public.”

The regulator also moved to classify any operation dealing with bitcoin futures contracts as a “Type 2” regulated activity under SFO (Securities and Futures Ordinance) laws. Marketing a bitcoin futures contracts will constitute a “Type 1” (dealing in securities) regulated activity and managing any cryptocurrency-related investment fund is to be deemed a “Type 9” (asset management) regulated activity.

The regulator also put the spotlight on “some unregulated cryptocurrency exchanges” that are already offering crypto-related futures contracts and investment products to the Hong Kong public. While it would be illegal for some unregulated exchanges to offer these services without a license from the SFC, the regulator cautioned investors of other exchanges operating outside its jurisdiction.

The regulator went on to warn investors about risks involved, stating:

The SFC reminds investors that trading cryptocurrencies may expose them to risks including insufficient liquidity, high price volatility and potential market manipulation… Investors may be exposed to substantial risks and significant financial losses in trading cryptocurrency futures contracts and other cryptocurrency-related investment products (eg options, swaps and contracts for differences), especially on unregulated exchanges.

The Hong Kong regulator’s cryptocurrency-centric circular comes a week ahead of the launch of bitcoin futures contracts offered by the CME Group, the world’s largest derivatives exchange.

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