Last Update：July 1, 2021

Risks of entering into Virtual Assets Related Products

You must consider carefully whether the risks set out below, as well as all other applicable risks, are acceptable to the Customer prior to any transaction on virtual assets related products.

Virtual assets or virtual assets related products (“VA”) pose significant risks to investors. Some of these risks are inherent in the nature and characteristics of the virtual assets themselves and others stem from the operations of platforms or portfolio managers.   

(i) Liquidity, volatility and valuation
Virtual assets are generally not backed by any physical assets or guaranteed by the government. They have no intrinsic value. Some of the virtual assets may not circulate freely or widely, and may not be listed on any secondary markets. There may be lack of secondary markets for investors to trade virtual assets or VA. There may not have any generally accepted valuation principles governing certain types of virtual assets.

The value of the virtual assets or VA may fluctuate significantly over a short period of time. This means there is a high risk that the price of virtual assets or VA may move up or down, and may become valueless. Investor will lose some or all of your money.   Any virtual asset may decrease in value or lose all of its value due to various factors including discovery of wrongful conduct, market manipulation, change to the nature or properties of the virtual asset, governmental or regulatory activity, legislative amendment, suspension or cessation of support for a virtual assets/VA or other exchanges or service providers, public opinions, or other factors outside of our control.

Prices on the secondary market are driven by supply and demand and are short-term and volatile by nature. The volatility faced by investors may be further magnified where liquidity pools for virtual assets are small and fragmented.

(ii) Cybersecurity and safe custody of assets
Trading platform operators and portfolio managers may store clients' assets in hot wallets (ie, online environments which provide an interface with the internet). These can be prone to hacking. Cyber-attacks resulting in the hacking of virtual asset trading platforms and thefts of virtual assets are common. Victims may have difficulty recovering losses from hackers or trading platforms, which can run to hundreds of millions of Hong Kong dollars. Virtual asset funds face a unique challenge due to the limited availability of qualified custodian. Available solutions may not be totally effective.

Transactions involving virtual assets are irrevocable. Lost or stolen virtual assets may be irretrievable. Once a transaction has been verified and recorded on a blockchain, loss or stolen virtual assets generally will not be reversible.

(iii) Market integrity
Unlike regulated stock exchanges, the market for virtual assets is nascent and may not operate under a set of recognised and transparent rules. Outages are not uncommon, as are market manipulative and abusive activities, and these all result in investor losses.

(iv) Conflicts of interest
Virtual asset trading platform operators may act as agents for clients as well as principals. Virtual asset trading platforms may facilitate the initial distribution of virtual assets (eg, initial coin offerings), facilitate secondary market trading, or both, as in a traditional exchange, alternative trading system or securities broker. If these operators are not under the purview of any regulator, it would be difficult to detect, monitor and manage conflicts of interest and has a risk of price manipulation on trading, lending or other dealing platforms.

(v) Inadequate and inconsistent regulation
Virtual assets/VA may not be subject to regulations associated with a regulated financial product, including, but not limit to, licensing requirement, audit, trade reporting requirements, anti-money laundering rules, market manipulation rules, market integrity principle.  The markets for virtual assets/VA are therefore especially susceptible to manipulation and fraud which can have a negative impact on the price of virtual assets/VA.

Among the accounting profession body, there may not be an agreed standards and practices for auditor to perform assurance and valuation procedures to obtain sufficient audit evidence for the existence and ownership of virtual assets, and ascertain the reasonableness of the valuations.

(vi) Fraud

Virtual assets may be used as a means to defraud investors.
Virtual asset trading platform operators or portfolio managers may not have conducted sufficient product due diligence before allowing  virtual assets to be traded on their platforms or investing in a virtual asset for their portfolios. As a result, investors may become victims of fraud and lose their investments.

(vii) Absence of robust regulations and protection on virtual assets/VA

Not only virtual assets itself, trading, lending, dealing platforms and custodians of virtual assets may be unregulated in some countries.  There may not have any guarantees and safeguards provided by Government or regulatory bodies.  New unforeseen risks may arise from investing in new types of virtual assets or investing in new market participants’ complex transaction strategies products.

Moreover, there may be an absence of a robust regulatory system for virtual assets/VA.   Global regulatory bodies may face difficulties on developing a robust regulatory system for virtual assets/VA due to the continuing evolution and development of virtual assets/VA.

(viii) Virtual assets/VA contains default risks and/or counterparty risks.

Default risk could come from the issuer's failure to make payments as agreed.  At time of market downturn, an issuer may default due to their inability to fulfil their commitments.

Counterparty risk refers to the failure of the trading party in fulfilling their financial contractual obligations.

Risks of entering into virtual asset futures contracts

The prices of the virtual assets which underlie these futures contracts fluctuate, sometimes dramatically. This may be due to insufficient liquidity.  The difficulty in valuing the underlying virtual assets will in turn pose significant challenges for investors in reliably valuing virtual asset futures contracts.

Investors are exposed to amplified risks due to the highly leveraged nature of futures contracts. Moreover, the complexities and inherent risks of virtual assets and/or virtual asset futures contracts are likely to be difficult for the average investor to understand. From time to time, there have been reports of market manipulative and abusive activities on platforms offering or trading virtual asset futures contracts. Such platforms may not have clear and fair trading rules. Some platforms have been criticised by investors for changing their trading rules during the life of futures contracts, for instance, halting trades or rolling back transactions and causing significant losses to investors.

As VA is a relatively new class of asset, there may be additional risk which have not been identified and mentioned.  Due to volatility and unknown risk nature, the Customer should only invest in VA if the Customer are prepared to accept the risk of losing all the monies they have invested in VA.