Hong Kong SFC sounds warning over cryptocurrency futures

Bitcoin’s high price volatility and illiquidity may be magnified in new cryptocurrency futures contracts, warns securities watchdog

Hong Kong’s Securities and Futures Commission (SFC) has warned financial services providers and investors of the risks associated with cryptocurrency futures contracts.

These new types of financial products are steadily becoming available in overseas markets – particularly the US, where exchange giants CME Group and Cboe Global Markets have recently launched their respective versions.

German exchange operator Deutsche Boerse is also considering launching Bitcoin futures, with a view to kindling a European marketplace.

In an 11 December circular, the SFC said that it foresees a high likelihood of avenues opening up in Hong Kong that would enable investors to trade on such products through intermediaries.

“However,” the watchdog points out, “dealing in these contracts for investors in Hong Kong and related services – including relaying or routing orders – constitute regulated activities and require a licence from the SFC, regardless of whether the business is located in Hong Kong.”

It notes: “Bitcoin futures have the conventional features of a ‘futures contract’, which is defined in the Securities and Futures Ordinance (SFO) to include ‘a contract or an option on a contract made under the rules or conventions of a futures market’.

“Therefore, even though the underlying assets of Bitcoin futures are not regulated under the SFO, Bitcoin futures traded on, and subject to the rules of, those exchanges are regarded as ‘futures contracts’ for the purposes of the SFO.”

The same applies, says the regulator, to other, similar investment products – such as cryptocurrency options, swaps and contracts for differences.

“Depending on their terms and features,” it warns, “some of them may be regarded as ‘securities’, as defined in Hong Kong’s SFO.”

SFC executive director of intermediaries Julia Leung said: “Parties routing orders from investors in Hong Kong to trade Bitcoin futures contracts without a relevant licence from the SFC may be committing a criminal offence.”

She adds: “Investors are warned that the risks of high price volatility and illiquidity may be magnified in trading cryptocurrency futures contracts, and other related investment products, by the speculative nature of the underlying assets – that is, the cryptocurrencies – and the leverage embedded in these products.”

The SFC reminds investors that client assets have regularly been stolen or misappropriated from cryptocurrency exchanges – some of which have collapsed.

Investors should therefore carefully weigh all of these negative factors against their own risk appetites.

Read the SFC’s circular in full here.

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