The Securities and Futures Commission (SFC) in Hong Kong has introduced new regulatory guidance enabling licensed Virtual Asset Trading Platforms (VATPs) and exchange-traded funds (ETFs) to provide staking services, as announced in a statement on April 7.
Staking, which involves locking tokens to validate transactions in exchange for rewards, is fundamental to blockchain networks operating on a proof-of-stake (PoS) mechanism like Ethereum. This practice has drawn interest from both institutional and retail investors, offering them opportunities to earn yields on their staked tokens.
In discussing the update, SFC CEO Julia Leung noted that this move showcases the regulator’s dedication to fostering innovation while ensuring investor protection remains a priority. She emphasized that safeguarding client assets must be integral to any new cryptocurrency service launched under the SFC’s oversight.
VATP Staking Regulations
According to the new guidelines, VATPs are required to establish stringent internal controls to minimize errors and mitigate risks associated with staking.
This involves protocols for managing operational risks, addressing conflicts of interest, and maintaining transparency in the management of client assets.
Importantly, platforms must retain control over all tools used to access or withdraw client assets, which means they cannot rely on third-party custodians for client virtual assets.
Nonetheless, if any aspect of the staking service is outsourced, VATPs must perform thorough due diligence and obtain prior approval from the SFC.
Furthermore, disclosure requirements have been strengthened. Platforms are now obligated to furnish clients with comprehensive details regarding the staking service, including supported assets, associated risks, lock-up periods, fees, unstaking processes, and other contractual terms.
This initiative aims to ensure that users fully understand the service parameters before engaging.
In cases where third-party involvement is unavoidable, such as in outsourced staking functions, VATPs must conduct due diligence and seek regulatory approval beforehand.
ETFs and Staking
For ETFs, the SFC will permit staking through licensed VATPs or authorized institutions (AIs), provided that fund managers adhere to specific stringent conditions.
These include ensuring that staking aligns with the fund’s objectives, effectively managing risks, and maintaining ongoing oversight of service providers.
Additionally, fund documentation must clearly state the percentage of virtual assets allocated for staking, potential returns, associated risks, and related expenses.
If staking activities significantly impact the fund’s risk profile or investment strategy, managers are required to inform investors ahead of time and ascertain whether shareholder approval is necessary.
