Hong Kong sets new rules allowing staking services for crypto firms and ETFs

SFC mandates strict controls for VATPs on new staking services, prioritizing transparency and client asset safety.

Cover art/illustration via CryptoSlate. Image includes combined content which may include AI-generated content.

Hong Kong’s Securities and Futures Commission (SFC) has unveiled new regulatory guidance allowing licensed Virtual Asset Trading Platforms (VATPs) and exchange-traded funds (ETFs) to offer staking services, according to an April 7 statement.

Locking up tokens with staking to validate transactions in exchange for rewards is central to blockchain networks running on a proof-of-stake (PoS) system like Ethereum. This process has attracted institutional and retail investors, allowing them to earn yields on their staked tokens.

Commenting on the update, SFC CEO Julia Leung said the decision reflects the regulator’s commitment to supporting innovation without compromising investor protection. She added that client asset safety must remain at the core of any new crypto service introduced under the SFC’s watch.

VATP’s staking rule

Under the new rules, VATPs must implement strict internal controls to avoid errors and reduce risks linked to staking.

This includes procedures for managing operational risks, resolving conflicts of interest, and ensuring transparency in handling client assets.

Crucially, platforms must retain control over all tools used to access or withdraw client assets. So, using third-party custodians for client virtual assets will not be allowed.

However, if staking services involve outsourcing any part of the process, VATPs must conduct proper due diligence and secure prior approval from the SFC.

Meanwhile, disclosure requirements have also been tightened. Platforms must provide clients with complete information on the staking service, covering supported assets, risk factors, lock-up periods, fees, unstaking procedures, and other contractual terms.

The goal is to ensure users understand the scope of the service before participating.

Where third-party involvement is necessary, such as in outsourced staking operations, VATPs must carry out due diligence and obtain regulatory approval before proceeding.

ETFs staking

For ETFs, the SFC will allow staking through licensed VATPs or authorized institutions (AIs) as long as fund managers follow strict conditions.

These include ensuring that staking aligns with the fund’s objectives, managing risks effectively, and continuously overseeing service providers.

Additionally, fund documents must disclose the proportion of virtual assets used for staking, potential returns, associated risks, and expenses.

If staking activities significantly alter a fund’s risk profile or investment strategy, managers must notify investors in advance and determine if shareholder approval is required.