Hong Kong securities watchdog warns of high risks associated with virtual assets after cryptocurrency exchange FTX collapse

Investors placing bets on virtual assets should be aware of risks associated with such investment products as they are mostly unregulated, Hong Kong’s securities watchdog warned.

“Investors are urged to be wary of the potential high risks associated with virtual asset arrangements,” the Securities and Futures Commission (SFC) said in a statement late on Tuesday. “If they cannot fully understand them and bear the potential significant or total losses, they should not make an investment.”

The SFC said it has noticed that virtual, or cryptocurrency, assets have remained popular among investors, despite previous risk warnings by its subsidiary, the Investor and Financial Education Council, which is dedicated to improving financial literacy in Hong Kong.

Cryptocurrencies are digital currencies in which transactions are verified and records are maintained by a decentralised system, rather than a centralised authority.

Awareness of the risk of potential losses in the event of fraud and collapse of virtual asset platforms is especially important, given the recent fallout from troubles encountered by a number of platforms, it noted.

Last month FTX, once the world’s second-largest cryptocurrency exchange, filed for bankruptcy less than a week after a run on the exchange.

Before its fall from grace, FTX was seen as a lost opportunity for the city, as it had moved from Hong Kong, where it was founded, to the Bahamas, which had friendlier policies for cryptocurrency companies.

In early November, it came to light that FTX had mishandled customer funds by loaning them to its affiliated derivatives trading platform Alameda Research. Both firms were founded by Sam Bankman-Fried, who apologised when they filed for bankruptcy on November 11.

He was charged by the US Securities and Exchange Commission on Tuesday with defrauding investors.

Late last month, Eddie Yue Wai-man, CEO of the Hong Kong Monetary Authority – the city’s de facto central bank – said FTX’s collapse had shown that sound regulations are a must for the city’s pursuit of becoming a virtual assets hub, and that a planned new regulatory regime will give investors adequate protection.

Although some virtual asset investments are marketed as deposits or savings-like products, they are not regulated and are not the same as bank deposits. Investors are therefore not afforded with any protection if the platform operators collapse, the SFC said.

Additionally, as the vast majority of virtual asset platforms are not regulated, their operations may not be transparent.

“If a virtual assets platform, or the counterparty to which the virtual assets deposited by investors are on-lent, ceases operation, collapses, or is hacked or exposed to fraud, investors may not be able to get back their [investment],” the SFC said.

Insufficient liquidity, high price volatility, opaque pricing, potential market manipulation, hacking and fraud are among the risks faced by investors trading on such unregulated platforms, it added.

The SFC also reminded virtual asset product marketers that investment schemes in which participating investors do not have day-to-day control and the assets are pooled and managed by the operator could amount to a collective investment scheme.

Issuing an advertisement, or inviting the public to participate in a collective investment scheme, is an offence under Hong Kong laws, unless the issue has been authorised by the SFC or an exemption applies, it added.