Hong Kong’s Securities and Futures Commission (SFC) has recently announced new regulatory guidance that allows licensed Virtual Asset Trading Platforms (VATPs) and exchange-traded funds (ETFs) to offer staking services. Staking involves locking up tokens to validate transactions on blockchain networks that operate on a proof-of-stake (PoS) system, such as Ethereum. This process enables investors to earn rewards on their staked tokens, attracting both institutional and retail investors.
SFC CEO Julia Leung emphasized that the decision to allow staking services reflects the regulator’s commitment to fostering innovation while prioritizing investor protection. She highlighted the importance of maintaining client asset safety as a core aspect of any new crypto service introduced under the SFC’s oversight.
The new regulatory rules require VATPs to implement stringent internal controls to mitigate risks associated with staking. These controls include procedures for managing operational risks, resolving conflicts of interest, and ensuring transparency in handling client assets. Platforms must retain control over all tools used to access or withdraw client assets, prohibiting the use of third-party custodians for client virtual assets. In cases where outsourcing is necessary, VATPs must conduct due diligence and obtain approval from the SFC.
Disclosure requirements for staking services have also been enhanced to ensure clients have a comprehensive understanding of the service. Platforms must provide detailed information on supported assets, risk factors, lock-up periods, fees, unstaking procedures, and contractual terms to enable informed participation.
In the case of ETFs, the SFC permits staking through licensed VATPs or authorized institutions (AIs) under strict conditions. Fund managers must ensure that staking aligns with the fund’s objectives, effectively manage risks, and oversee service providers continuously. Fund documents must disclose the proportion of virtual assets used for staking, potential returns, associated risks, and expenses. Significant changes in a fund’s risk profile or investment strategy due to staking activities require advance notification to investors, with a determination if shareholder approval is necessary.
Overall, the SFC’s regulatory guidance on staking services for VATPs and ETFs underscores the importance of maintaining investor protection while fostering innovation in the crypto industry. By implementing stringent controls and disclosure requirements, the regulator aims to ensure the safe and transparent operation of staking services in Hong Kong’s virtual asset market.