Preparing for investor protection regulations on virtual assets

This article was written by Kate Lee, Global Head of Regulatory Enterprise Data, Buket Theobald, Regulatory Data Product Manager & Thomas Labbe, Global Regulatory Product Manager at Bloomberg. 

The investor protection agenda policy stepped up several gears following the aftermath of the 2008 global financial crisis. This event sparked renewed focus from regulators globally into designing better protocols to protect retail investors and led to the development of the MIFID II framework in Europe. Fast forward to today and the growth and volatility of the virtual asset space is prompting further thinking around investor protection frameworks, particularly considering the high proportion of retail investors exposed to the ebbs and flows of this market.

With spot markets for virtual assets being largely unregulated at present, there are a number of investor protection concerns, such as a lack of price transparency and potential market manipulation, for regulators to think about. Hong Kong has been relatively quick off the mark in terms of thinking about an appropriate policy response to the investor protection concerns associated with the virtual assets space. For instance, on January 28, 2022, the Hong Kong Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) published a joint circular on the distribution of virtual assets funds. This was then superseded and updated by the SFC circular, dated December 22, 2023.

Breaking down the SFC and HKMA regulation on the distribution of virtual assets funds

The SFC and the Hong Kong Monetary Authority now require intermediaries distributing virtual asset-related products (VA-related products) to comply with tight requirements, including ensuring the suitability of VA-related products for retail investors, irrespective of whether or not there has been a solicitation or recommendation. In addition to that, there are further investor protection measures such as selling restrictions, VA knowledge test and risk disclosure requirements that must be performed. 

These new investor protection measures related to virtual assets are not unique to Hong Kong. In the Middle East, the Virtual Asset Regulation Authority has also set out a comprehensive framework for the emirate of Dubai. The regulator has launched a number of checks, including looking through a fund’s constituents and determining the direct exposure to virtual assets.

Complying with these new guidelines is not without its challenges. Financial institutions have flagged that it can be hard to identify direct or indirect exposure to virtual assets via funds. Additionally, firms would need to figure out how to automate an existing manual process so they can effectively communicate with their retail clients before a transaction is completed. Finally, if these regulations continue to spread globally, firms will need to have the infrastructure in place to navigate through various regulatory regimes with their particular requirements at scale.

How can we help?

To help intermediaries respond to the joint circular, Bloomberg provides a Data License regulatory solution which provides indicators for identifying VA-related products.

VA exposures are flagged when an instrument’s principal investment objective or strategy is focused on investing in virtual assets,when its value is predominantly derived from virtual assets, or when it tracks or replicates investment results that are closely aligned with the performance of virtual assets.

The solution includes various indicators created to aid intermediaries in assessing whether a virtual asset qualifies as a complex product. According to regulatory mandates, certain virtual asset-related products are restricted to professional investors only, and the solution explicitly highlights these products, ensuring compliance with the established guidelines.

It also incorporates a sophisticated mechanism for performing up to three levels of look-through on underlying fund holdings. This feature is particularly valuable for clients seeking to identify or adhere to jurisdictional regulations that necessitate such transparency. By leveraging the relevant attributes and indicators embedded within the solution, clients can navigate the complexities of regulatory compliance with confidence.

In summary, Bloomberg’s data-driven solution serves as a comprehensive tool for intermediaries, streamlining the identification of direct exposures to virtual assets, assessing product complexity, and ensuring compliance with the growing number of jurisdictional requirements, all while enhancing operational efficiency in an evolving regulatory landscape.

To learn more about Bloomberg’s Investor Protection Data Solution, request a demo here.