"Those investment tycoons in the crypto market do not rely on luck but on strength. How do they lead the crypto market? Crypto quantitative investment refers to achieving cryptocurrency investment returns through mathematical modeling, data analysis, and automated trading strategies. With 24-hour trading, scientific objectivity, and high efficiency, quantitative teams leverage these advantages in the crypto market to reduce the impact of human emotions on investment decisions through high-frequency trading and automated strategies, safely and transparently obtaining profits."

▲ Development logic of quantitative systems

As an international financial center, Hong Kong occupies a crucial position globally with its open market environment, robust regulatory system, and advanced infrastructure, leading the way in the development of the cryptocurrency sector.

In 2017, the Hong Kong Securities and Futures Commission (SFC) issued the "Declaration on Initial Coin Offerings," clarifying that digital tokens involved in initial coin offerings (ICOs) may be classified as "securities," and that a license is required to engage in related activities; the release of the "Circular to Licensed Corporations and Registered Institutions on Bitcoin Futures Contracts and Cryptocurrency-Related Investment Products" also signifies that Hong Kong has begun regulating cryptocurrencies.

In 2023, the licensing system for Virtual Asset Service Providers (VASP) was implemented, requiring all centralized virtual asset exchanges operating in Hong Kong or promoting services to Hong Kong investors to obtain a license from the SFC and be regulated by it.

These policy changes provide investors with a stable market foundation, making Hong Kong the preferred location for global cryptocurrency and blockchain technology development.

Several names may be familiar to many: HashKey Group, OSL, MaiCapital, and the success of these leading Asian virtual currency exchanges and funds is closely tied to their quantitative teams.

In this city of limitless potential, the crypto investment market may face unprecedented opportunities and challenges.

Next, let lawyer Mankun take you deeper into understanding why Hong Kong has become the preferred place for crypto investment quantitative teams.

Common Quantitative Trading Methods

Crypto asset quantitative trading has specific structures and applicability based on its different characteristics, gradually becoming an important part of the crypto market. These trading strategies are algorithm-driven, reducing the influence of human emotions on trading, thereby improving trading efficiency and accuracy. Here are several main quantitative trading methods:

1.

Hedging Trading: This refers to investors simultaneously conducting two trades that are related in variety, opposite in direction, and equivalent in position. In simple terms, it involves simultaneously buying and selling highly correlated digital currencies in different markets, which carries lower trading risk. This method is commonly used by startups for venture capital or private equity investments to maintain a diversified asset portfolio.

Legal and Compliance Considerations: Since hedging trades involve multiple markets and trading platforms, fund managers must ensure the qualifications and security of the trading platforms, especially in cross-border transactions, adhering to anti-money laundering (AML) and know your customer (KYC) requirements.

2.

Trend Trading: This utilizes market conditions and trend indicators to automatically determine buy and sell timing through computer programs. When a clear market trend emerges, it automatically issues buy or sell signals. This trading strategy is relatively complex but can help investors capture opportunities in market upswings or downturns.

Legal and Compliance Considerations: Trend trading involves high-frequency trading (HFT), and the SFC's regulation of HFT mainly focuses on traditional financial markets, with fewer specific regulations for crypto asset trading. However, fund managers must ensure that algorithmic trading systems have adequate risk management and auditing mechanisms to reduce potential compliance risks from operational errors.

3.

Hybrid Model: This combines the characteristics of multiple models, including trading in cryptocurrencies and their derivatives, as well as equity investments in related companies. Hong Kong fund management companies have established strict investment allocation and redemption mechanisms, conducting regular audits to ensure the safety and fairness of the funds. This structure provides managers with flexibility to switch between different investment strategies based on market conditions and investment opportunities.

Legal and Compliance Considerations: The hybrid model involves different types of assets and trading methods, requiring managers to comply with the regulatory requirements of the relevant fund types. For example, equity investments must comply with the Securities and Futures Ordinance (SFO) requirements, while crypto asset trading must adhere to AML and KYC regulations.

When determining the applicable laws and regulations for Hong Kong fund managers, we must also consider whether the fund instruments are private funds or SFC-authorized funds. For SFC-authorized hedge funds, there are specific guidelines that must be followed. According to these guidelines, certain types of authorized hedge funds require a minimum subscription amount, such as $10,000 for funds of funds and $50,000 for single hedge funds, while hedge funds with 100% capital guarantee characteristics have no subscription amount limit. Additionally, the SFC has set higher standards for risk management and internal control systems for authorized hedge funds.

Types of Funding Sources and Compliance Requirements

Under the SFC's regulation, funds from different sources must meet different compliance requirements to ensure legal and transparent transactions, protecting operators and investors:

1. Own Funds: Funds may come from the personal assets of team members, internal accumulations of the team, or profits generated by the team itself. This type does not involve external investor funds, so compliance requirements are relatively low, but internal risk management and internal control processes must still be followed.

2. Private Funds: Private funds typically come from high-net-worth individuals, professional investors from companies, or institutional investors. Compared to authorized retail funds, this type of funding usually has a higher investment threshold and is subject to relatively relaxed regulatory requirements. If fund management activities are conducted in Hong Kong, a Type 9 license must be applied for, regardless of the nature of the fund. Under the Open-Ended Fund Company (OFC) framework in Hong Kong, these funds need to be registered with the SFC. Private funds can be closed-end or open-end, depending on the overall investment structure and investment assets. Private funds must be managed by licensed fund managers and have external fund administration and auditors. Compliance requirements for these funds include adherence to AML and KYC procedures, as well as regular compliance audits and risk management reports.

3. Public Funds: Some funds may come from cryptocurrency ETFs, which are aimed at public investors, subject to stricter regulations, often adopting passive strategies, being custodied by third parties, and circulating in the secondary market. Their compliance requirements involve public issuance and trading of the fund, including information disclosure, investor protection, and market conduct norms.

Regardless of the type, all must comply with the SFC's regulatory requirements, such as the independent storage of client funds, compliance with anti-money laundering and counter-terrorism financing regulations, risk management, and cybersecurity measures. So, what does Hong Kong's regulatory framework look like?

Regulatory Framework

1. Compliance Requirements in Hong Kong, Singapore, Switzerland, and the United States

Among the global Chinese-speaking community, several popular countries and regions have some differences in their regulatory frameworks for crypto funds:

· Singapore: In 2024, the Monetary Authority of Singapore (MAS) introduced stricter regulations for cryptocurrency and digital payment token (DPT) services, covering areas such as custodial services and cross-border fund transfers. In November, two new industry frameworks were released to promote the tokenization of funds and fixed-income instruments.

· Switzerland: The Swiss Financial Market Supervisory Authority (FINMA) is one of the first financial regulatory agencies globally to establish a clear regulatory framework for cryptocurrencies and blockchain technology. FINMA ensures the legality and transparency of cryptocurrency businesses through its "Swiss Blockchain Law" and "Financial Market Infrastructure Act (FMIA)."

· United States: The U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) play important roles in regulating crypto activities. However, due to the decentralized regulation across U.S. states, discussions need to be held regionally.

· Hong Kong: The Hong Kong Securities and Futures Commission (SFC) provides a transparent and stable regulatory environment, requiring different licenses based on the business conducted, with at least a Type 9 license needed, primarily regulating fund managers and fund products.

In summary, Hong Kong's crypto policy is flexible, with a stable regulatory environment and friendly tax policies that encourage market innovation and strengthen cooperation with traditional financial institutions; Singapore is more attractive to digital asset companies, with policies leaning towards stability, focusing on compliance and risk management; Switzerland has developed its regulatory framework earlier, being a pioneer and promoter in the global cryptocurrency market; while in the United States, due to inconsistent regulation, crypto fund managers face relative restrictions.

2. Role of the Hong Kong Securities and Futures Commission (SFC)

To enhance public understanding of the operation and functions of crypto funds, provide protection to the public investing in or holding cryptocurrency products, and reduce illegal activities within the industry, Hong Kong's regulatory authorities have imposed a series of compliance requirements on crypto fund teams.

The Hong Kong Securities and Futures Commission (SFC) is the main regulatory body for the securities and futures market in Hong Kong and also serves as the primary regulator for cryptocurrencies. The SFC regulates the cryptocurrency market by formulating and implementing relevant regulations, including the Securities and Futures Ordinance, ensuring that cryptocurrency funds operate under regulation, thereby increasing market transparency and standardization.

3. SFC's Regulatory Principles

Choosing to engage in crypto quant trading in Hong Kong, the SFC has set forth at least four requirements:

· Compliance Operations: The SFC regulates the cryptocurrency market by formulating and implementing the Securities and Futures Ordinance and other guidelines and circulars related to virtual assets, ensuring that the entire crypto market operates under the SFC's supervision.

· Licensing System: All cryptocurrency exchanges and platform operators operating in Hong Kong must obtain licenses, raising the safety and stability threshold for these platforms.

· Due Diligence: All cryptocurrency-related enterprises must comply with Hong Kong's anti-money laundering and counter-terrorism financing regulations (AML/CTF), implement customer due diligence (KYC), and report suspicious trading activities.

· Regulatory Sandbox: The SFC, in collaboration with the Hong Kong Monetary Authority (HKMA), has established a fintech regulatory sandbox, allowing crypto-related enterprises to test their products and services in a controlled environment and conduct risk assessments in advance.

Compliance and Risk Management

So, if one wants to operate a crypto fund, what aspects of risk management should be emphasized?

1. Compliance Framework: A comprehensive compliance framework and effective risk management strategy must be established, including anti-money laundering (AML) and counter-terrorism financing (CFT) measures to reduce investment risks in virtual assets.

2. Asset Segregation: Ensure that assets are independent of the manager's and other related parties' assets, safeguarding investors' property.

3. Customer Due Diligence (KYC): All cryptocurrency-related enterprises, including exchanges and wallet service providers, must implement customer due diligence and report suspicious trading activities.

4. Internal Control and Monitoring Mechanisms: Internal control and monitoring mechanisms need to be established, with regular audits and reports on related activities to ensure compliance.

5. Cold Storage Solutions: To prevent hacking and asset theft, cold storage (offline storage) should be used.

6. Regular Reporting: Custodians need to provide regular asset reports to management companies and investors to ensure timely and transparent information.

Therefore, avoiding these risks and successfully establishing a crypto quantitative team is no small feat; reasonable planning and support from a professional team are crucial."

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