SFC Publishes Warning Statement on Unregulated Virtual Asset Platforms
The Securities and Futures Commission (SFC) is aware that Binance has offered trading services in stock tokens (Stock Tokens) in a number of jurisdictions and is concerned that these services may also be offered to Hong Kong investors.
The SFC wishes to make it clear that no entity in the Binance group is licensed or registered to conduct “regulated activity” in Hong Kong, the regulator said in a press release.
Stock Tokens are virtual assets that are represented to be backed by different depository portfolios of underlying overseas listed stocks, with their prices closely tracking the performance of the respective stocks. As Stock Tokens can be denominated in fractional units, they are being promoted as an alternative means for investors to purchase fractional shares instead of the entire fully paid-up shares.
In Hong Kong, Stock Tokens are likely to be “securities” under the Securities and Futures Ordinance (SFO) and if so, they are subject to the regulatory remit of the SFC.
The SFC warns that where the Stock Tokens are “securities”, marketing and/or distributing such tokens – whether in Hong Kong or targeting Hong Kong investors – constitute a “regulated activity” and require a licence from the SFC unless an applicable exemption applies.
It may also be an offence for any person to offer such tokens to the Hong Kong public without the SFC’s authorisation or registration. Any person who contravenes a relevant provision may be prosecuted and, if convicted, subject to criminal sanctions.
Investors are urged to be extremely careful if they plan to invest in Stock Tokens offered on unregulated platforms. If a platform is unregulated, there may not be any due diligence or audit conducted by an independent third party to confirm the truthfulness of the representation that the relevant Stock Token is actually backed by an equivalent depository portfolio of the underlying share.
The rights attached to the relevant Stock Token might not be fully disclosed to investors, for example, the entitlement to voting rights, the right to dividends, the right to redemption of the underlying stock, the arrangement and entitlement if the underlying stock is spilt or bonus shares and options are issued.
“The SFC does not tolerate any violations of the securities laws and will not hesitate to take enforcement action against unlicensed platform operators where appropriate,” said Mr Thomas Atkinson, the SFC’s Executive Director of Enforcement. “Investors should be wary of the risks of trading virtual assets on an unregulated platform. If the platform ceases operation, collapses, or is hacked, investors may face the possible risk of losing their entire investments held on the platform.”
The SFC has received complaints from investors who experienced difficulties in withdrawing fiat currencies or virtual assets from their accounts opened with unregulated platforms. Investors are further reminded that if such platforms do not have a nexus with Hong Kong, the SFC may not have jurisdiction over them. In case of disputes, seeking recourse is likely to be difficult and legal remedies may be unavailable.
Intermediaries are also reminded to observe the SFC’s circular which provides that if they intend to provide any financial services in virtual assets, they should notify and discuss their plans with the SFC at an early stage to avoid adverse regulatory consequences.
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