“Brokers who want to trade virtual assets for retail investors need to have responsible officers with virtual-asset knowledge,” Lui added. “They also need to show the SFC that they have internal controls, client money custody and insurance arrangements to safeguard client interests.”

Brokers currently do not require additional specific licences to service their clients in trading Hong Kong-listed exchange-traded fund futures based on bitcoin and ether. However, those planning to provide active trading of virtual assets – such as cryptocurrencies and their related futures products – will need additional approval from the SFC, Lui added.

GEM-listed Victory Securities and Interactive Brokers are the first two brokerage firms in the city that have already gained approvals from the SFC to trade virtual assets, but strictly only for professional clients.

Hong Kong securities watchdog warns of virtual assets risks after FTX collapse

“Offering virtual assets trading to clients will give more product choices to our customers,” said Kennix Chan, executive director of Victory Securities. “We have seen many customers who are interested in investing in virtual assets. A new regulatory regime will boost their confidence in the product.”

Chan said banning retail investors from trading virtual assets may force them to turn to unregulated platforms outside the local jurisdiction, exposing them to tremendous risks.

For intermediaries who want to be involved in virtual-asset trading, they need to be clear about the requirements and discuss their plans with the regulators, said Karen Man, a partner in Baker McKenzie’s financial services regulatory practice in Hong Kong.

“They should also review their business arrangements, processes and procedures, as well as identify appropriate business partners and service providers,” she said.

She said the SFC is one of the first regulators to introduce a comprehensive regulatory framework for regulating virtual asset trading platforms, which covers areas such as custody of client assets, cybersecurity, market surveillance, and risk management.

The Hong Kong Investment Funds Association (HKIFA), the industry body for the fund houses in the city, welcomed the virtual asset regulatory regime as it widens the menu of asset classes for local mutual funds.

“However, as the cryptocurrency market is still in a state of flux, and there are a whole host of issues, such as legal ownership, right enforcement, liquidity, custody and validation, that remain to be clarified,” CEO Sally Wong said. “More deliberations would be required to ensure investor interest is adequately protected.”

FTX was the world’s second-largest cryptocurrency exchange before it went bankrupt within a week in November. Its sudden collapse has shown the importance of proper regulation in the sector, according to Robert Lee Wai-wang, a lawmaker for Hong Kong’s financial services sector and CEO of local brokerage firm Grand Capital Holdings. A regulated trading platform offers better protection, he said.

“Cybersecurity is of utmost importance for all SFC-regulated firms and current regulation already requires them to have sufficient resources, policies and procedures to address cybersecurity risks,” Lee added. “It will be no different for those who trade virtual assets for clients.”