Hong Kong Unveils New Regulations for Virtual Asset Staking Services

Finance

Hong Kong Unveils New Regulations for Virtual Asset Staking Services

Hong Kongs Securities and Futures Commission (SFC) has announced updated regulatory guidance allowing licensed Virtual Asset Trading Platforms (VATPs) and exchange-traded funds (ETFs) to offer staking services.

This move, outlined in an April 7 statement, aims to provide a clearer framework for blockchain networks using a proof-of-stake (PoS) system, such as Ethereum, which allows investors to earn yields by locking up tokens to validate transactions.

Staking Services: New Rules for VATPs

Under the new regulations, VATPs are required to implement stringent internal controls to minimize risks associated with staking. The SFC emphasized the importance of client asset safety, and as such, platforms will need to manage operational risks, resolve conflicts of interest, and ensure transparency.

A key aspect of the update is the requirement for VATPs to maintain control over all tools used to access or withdraw client assets. Third-party custodians are not permitted, but if any part of the staking process is outsourced, VATPs must conduct thorough due diligence and obtain prior approval from the SFC.

The new rules also include comprehensive disclosure requirements, ensuring that platforms inform clients about the supported assets, risks, lock-up periods, fees, and other important details before clients participate in staking.

Staking Services for ETFs

The SFC has also clarified that ETFs can offer staking services through licensed VATPs or authorized institutions (AIs). Fund managers will be required to meet strict conditions, such as ensuring that staking aligns with the funds objectives and managing the associated risks effectively.

Additionally, ETF fund documents must provide details about the proportion of virtual assets used for staking, expected returns, risks, and related expenses. If staking activities significantly alter a funds risk profile or investment strategy, managers must inform investors in advance and potentially seek shareholder approval.

Support for Innovation and Investor Protection

SFC CEO Julia Leung noted that the updated guidance reflects the regulators commitment to fostering innovation within the cryptocurrency sector while maintaining investor protection as a top priority. The SFC aims to strike a balance between promoting new financial services and ensuring that clients are well-informed and protected.

This regulatory development is expected to encourage further institutional and retail participation in the staking space while maintaining strict standards for risk management and transparency.