Hong Kong Intensifies Scrutiny over Digital Asset Treasuries

Hong Kong ’s Securities and Futures Commission is tightening its grip on digital asset treasuries, warning investors of potential risks. SFC Chair Kelvin Wong Tin-yau asserted that the agency is closely analyzing the use of DATs in the region. The regulatory watchdog is also examining whether guidelines are necessary to protect investors and maintain market stability.

Hong Kong’s SFC Monitors Digital Asset Treasuries

According to a recent South China Morning Post report, Hong Kong’s securities watchdog is strengthening their regulatory efforts, focusing on digital asset treasuries. “The SFC is concerned about whether DAT companies’ share prices are traded at a substantial premium above the cost of their DAT holdings,” said Chairman Kelvin Wong Tin-yau.

The SFC is reportedly examining the operations of digital asset treasuries among listed companies to determine if regulatory guidelines are needed. Wong warned that retail investors might not fully grasp the risks tied to DATs, urging them to understand these risks before investing. The regulator plans to intensify investor education on this topic and stated, “We caution investors to fully understand the underlying risks of DAT.”

Regulatory Concerns

The development in Hong Kong was driven by worries from the regulator that those US-listed companies that hold large amounts of Bitcoin (and trading at high multiples of Bitcoin net asset value) will amplify boom and bust cycles for shareholders, which illustrated a risk of instability when stock prices become unmoored from NAV. The connection of sentiment, leverage, and momentum can lead to a volatile and unpredictable relationship between the business model and cryptocurrency holdings for companies with exposure to DATs.

SFC Chairman highlighted the risks associated with digital asset treasuries, citing US cases where companies' share prices traded at substantial premiums to their crypto holdings. The SFC is closely monitoring listed companies' use of cryptocurrencies to manage excess cash or pivot towards cryptos as a core business. Wong noted,

“The regulatory principle here is to ensure the overall market quality of Hong Kong,” Wong said. The reform will focus on whether it can allow more companies to list under the regime while at the same time ensuring fair treatment to investors.”

The Hong Kong Exchanges and Clearing (HKEX) has reportedly challenged at least five companies seeking to shift their focus to DAT models, citing rules that prohibit excessive holdings of liquid assets. This move aims to ensure that listed companies' businesses are viable and sustainable. HKEX's market capitalization stands at $537.81B, with a price-to-earnings ratio of 34.82.