On February 9, 2018, the Hong Kong Securities and Futures Commission (“SFC”) released a statement which, among other things, informs the marketplace that the SFC sent letters to seven Hong Kong cryptocurrency exchanges warning against listing instruments that qualify as “securities” under the Securities and Futures Ordinance (“SFO”) without a required license.[1]  Additionally, the SFC sent letters to seven crypto token issuers inquiring about compliance with the securities laws.

In response to the letters, most cryptocurrency exchanges and initial coin offering (“ICO”) crypto token issuers either confirmed compliance or immediately took remedial measures,  according to the SFC statement.

The SFC statement acknowledges that the SFC may not have jurisdiction over exchanges and issuers that do not have a “nexus” with Hong Kong or do not provide services that qualify as “securities” or “futures contracts.”  However, it states that, regardless of jurisdiction, the SFC can refer instances of suspected fraud related to cryptocurrencies to the law enforcement officials.

Hong Kong officials previously warned that ICOs could be subject to securities laws, as applicable, after Chinese regulators banned ICO’s last September. The SFC reiterated the warning to potential investors of the volatility and risks of loses associated with cryptocurrency trading.  Regulators in other jurisdictions have released similar investor warnings regarding token sales and cryptocurrency trading.  For example, the European Securities and Markets Authority issued statements warning investors about the risks attendant to participating ICOs in November 2017 and the United Arab Emirates Securities and Commodities Authority issued a similar warning earlier this month.[2]

The SFC statement was issued just days after the U.S. Senate Banking Committee hearing on cryptocurrencies, where Securities and Exchange Commission (“SEC”) Chairman Jay Clayton stated, “every initial coin offering I have seen is a security.”[3]  The SFC statement also echoes SEC Chairman Clayton’s warning to “gatekeepers” that assist companies in complying with the securities laws and regulations.[4]  The SFC’s Chief Executive Officer, Ashley Alder,  stated that the SFC is “urging market professionals to do proper gatekeeping to prevent frauds or dubious fundraising and to assist us in ensuring compliance with the law.”

A number of crypto exchanges are based in Hong Kong, including Binance and KuCoin.  While both of these platforms offer access to U.S. persons, neither is registered in any capacity with the SEC or state agencies.  Foreign platforms that offer access to U.S. persons must be cognizant of the risk of U.S. federal or state regulators considering such products to be “securities” or “virtual currencies” thus requiring some sort of license, as appropriate, which may require registration as a national securities exchange or money transmitter.

Similarly, crypto token issuers should carefully evaluate the jurisdictional trajectory for their offerings in light of the SFC’s and SEC’s positions.  Regulators are expected to continue issuing information requests to crypto exchanges and issuers as part of their market oversight function.  In addition, given the SFC’s and Chairman Clayton’s recent statements, intermediaries and other industry gatekeepers also should be prepared to receive and respond to requests for information regarding token activities.

February 12, 2018


[1] The statement is available at sfc.hk.

[2] The statements are available at esma.europa.eu.

[3] We discussed securities class action lawsuits involving token sales in our last blog post, available at fintechupdate.com.

[4] A Reed Smith article on some of the most recent SEC enforcement actions is available at reedsmith.com.