Professional Investor Funds (“PIFs”) investing in Virtual Currencies (“VCs”) are now regulated through the supplementary conditions applicable to such schemes.
The additional provisions found in the new section, which is applicable to PIFs investing in VCs, can be categorised in the following:
1. General
The supplementary licence conditions apply to PIFs investing in VCs, either directly or through a Special Purpose Vehicle. Units of collective investment schemes which have been created through an Initial Coin Offering shall be deemed to be investing directly in VCs. PIFs investing in VCs shall only be established as investment companies, limited partnerships or unit trusts.
2. Competence
The parties and service providers involved in the scheme shall have sufficient knowledge and experience in the field of information technology, VCs, and their underlying technology. At least one of the Directors must satisfy this requirement. The Manager, the Administrator, the Custodian, the MLRO, the Compliance Officer, and the Auditor must also have sufficient experience and expertise for them to be appointed to the roles.
3. Governing body
Apart from the requirement of having at least one of its members with sufficient knowledge and experience in the field, the governing body must also ensure that the overall structure of the scheme ensures adequate division of responsibilities. The governing body shall also monitor its service providers to make sure that they are discharging their contractual obligations in a diligent manner. This monitoring process shall be done on an ongoing basis.
4. Quality Assessment
The Manager shall carry out appropriate research to assess the quality of the VC being invested into. Record keeping of this quality assessment process must be kept and made available to the governing body. In assessing the quality of the VC, the Manager shall take into account the following:
a. The Investor and Issuer;
b. The protocol and the underlying infrastructure;
c. The availability and reliability of information;
d. The service providers; and
e. The exchange on which the VC is traded.
5. Risk Management
The Manager shall ensure that the risks associated with each investment position of the scheme and the overall effect is clearly identified and shall be managed and monitored on an ongoing basis. The risk profile of the scheme must correspond to the size, structure and investment strategies and objectives of the scheme. The risk profile of the VC which the scheme is investing in must fall within the scope of the risk management policy of the scheme.
6. Liquidity Management
The scheme shall have a liquidity management system and procedures to monitor the liquidity risk of the scheme and to ensure the liquidity profile of the investments complies with the underlying obligations of the scheme. The scheme shall conduct regular stress tests under normal and exceptional liquidity conditions to assess the liquidity risks. The frequency of such tests depends on the nature, scale and complexity of the investment in VCs undertaken by the scheme. The liquidity profile and the redemption policy of the scheme must be consistent.
7. Valuation
The scheme shall conduct verification and valuation of the scheme’s investments in VCs. This function shall be performed by a person with the necessary experience and expertise. Such person may be either an external person who is independent from the scheme and from the Manager, or by the Manager himself provided that the valuation task is independent from the portfolio management function and that necessary measures are taken to ensure there is no conflict of interest.
PIFs investing in VCs are also required to submit the following additional documents in application:
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An assessment undertaken by the governing body that the proposed service providers have the necessary competence;
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Documentation that the proposed Investment Committee is set-up in line with the applicable rules; and
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Evidence that the Investment Committee members have a sufficient proven track record of trading on an established VC exchange.
