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SFC issues warnings on virtual asset futures contracts

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The Securities and Futures Commission (SFC) wishes to warn investors about the risks associated with the purchase of virtual asset (eg, Bitcoin) futures contracts1 in Hong Kong.

While virtual asset futures contracts may have different terms and features, they are typically instruments which allow investors to speculate on the prices of the underlying virtual assets at a future date. These contracts are considered to be extremely risky as they are largely unregulated and highly leveraged.

Risks associated with virtual asset futures contracts

The prices of the virtual assets which underlie these futures contracts are extremely volatile. The difficulty in valuing the underlying virtual assets will in turn pose significant challenges for investors in reliably valuing virtual asset futures contracts.

Investors are exposed to amplified risks due to the highly leveraged nature of virtual asset futures contracts. Moreover, the complexities and inherent risks of these products are likely to be difficult for the average investor to understand.

From time to time, there have been reports of market manipulative and abusive activities on platforms offering or trading virtual asset futures contracts. Such platforms may not have clear and fair trading rules. Some platforms have been criticised by investors for changing their trading rules during the life of futures contracts, for instance, halting trades or rolling back transactions and causing significant losses to investors.

Operation of virtual asset trading platforms may be illegal

To address the inherent risks associated with virtual asset futures contracts, some regulators from other major jurisdictions have been actively scrutinising them and considering intervention, for example, by imposing a total ban on the sale of virtual asset futures contracts to retail investors.

In Hong Kong, any trading platforms or persons which offer and/or provide trading services in virtual asset futures contracts without a proper licence or authorisation may be in contravention of the Securities and Futures Ordinance (SFO) (Cap. 571) or the Gambling Ordinance (Cap. 148).

Depending on how virtual asset futures contracts are structured, they may be considered as “futures contracts” under the SFO. Any person who operates a platform that offers or trades “futures contracts” is required to be licensed or authorised under the SFO unless an exemption applies.

The SFC has not licensed or authorised any person in Hong Kong to offer or trade virtual asset futures contracts. Given the current risks associated with these contracts and in order to protect the investing public, the SFC would be unlikely to grant a licence or authorisation to carry on a business in such contracts.

Virtual asset futures contracts may also be construed as contracts for differences under the Gambling Ordinance. The term “contract for differences” is defined in that Ordinance as “an agreement the purpose or effect of which is to obtain a profit or avoid a loss by reference to fluctuations in the value or price of property of any description or in an index or other factor designated for that purpose in the agreement”. All gambling activities in Hong Kong are unlawful except those expressly authorised under the Gambling Ordinance.

Persons who breach the relevant provisions of the SFO or the Gambling Ordinance may be prosecuted and, if convicted, subject to criminal sanctions.

Investor warnings

Investors should be wary that platforms offering or trading virtual asset futures contracts may potentially be operating illegally in Hong Kong. Further, the SFC has repeatedly reminded investors that investing in virtual assets may expose them to significant risks, in particular, insufficient liquidity, high price volatility and potential market manipulation. These risks may be further magnified when investing in virtual asset futures contracts as outlined above.

For enquiries, please contact the SFC Fintech unit at [email protected]

Intermediaries Division
Securities and Futures Commission

End

1 Excluding those Bitcoin futures contracts traded on US exchanges which are regulated by the US Commodity Futures Trading Commission and authorised by the SFC for the purpose of providing ATS in Hong Kong. For details, please refer to the Circular to Licensed Corporations and Registered Institutions on Bitcoin futures contracts and cryptocurrency-related investment products, 11 December 2017.

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Regulator Information

Abbreviation: SFC
Jurisdiction: Hong Kong

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