Hong Kong is actively looking at the approval of crypto ETFs

Hong Kong’s Securities and Futures Commission looks set to allow the launch of exchange-traded funds tracking cryptocurrency futures for retail investors, citing the growing sophistication of investor protection.

Julia Leung, deputy managing director and managing director of intermediaries at the SFC, said the regulator is “actively looking to set up a regime to authorize ETFs that provide mainstream virtual assets with appropriate investor protection”.

In the initial stages, the SFC will only allow ETFs that invest in bitcoin futures and ether futures traded on the Chicago Mercantile Exchange, Leung said during his keynote address at Hong Kong FinTech Week last week.

The latest communication follows a joint circular from the SFC and the Hong Kong Monetary Authority in January this year which said a “limited series” of products linked to virtual assets may be permitted for Hong Kong retail investors.

This article was previously published by Ignites Asia, a title owned by FT Group.

Leung characterized the existing requirement for professional investors for investments in cryptoassets as the “elephant in the room”, noting that when the SFC introduced this requirement as part of the virtual assets framework four years ago, the territory’s cryptoasset industry was still relatively new.

The SFC first issued rules on virtual assets in November 2018 that limit access to virtual asset-based funds to professional investors due to the increased risk associated with the asset class, as well as the lack of regulation around certain platforms or managers in the area.

“Given the novelty of our framework and the high volatility of cryptoassets, we felt it was prudent to impose an overall ‘professional investor’ restriction,” she said.

However, Hong Kong’s crypto-asset ecosystem had made “significant progress” over the past four years, with several global financial institutions and service providers entering the space and providing institutional-grade infrastructure. During this time, the regulator had gained more experience in regulating virtual asset trading platforms and fund firms, she claimed.

“We have come to believe that some initial concerns about virtual asset futures ETFs have become manageable and can be addressed with proper safeguards,” Leung said.

“Now is an opportune time to review the ‘for professional investors only’ requirement,” she added.

Richard Douglas, Hong Kong managing director of Saxo Markets, said the opening of crypto-based ETFs to local retail investors would help Hong Kong “re-establish its credentials as a financial hub and attract more talent to the city after some difficult years.” .

Demand from retail clients for crypto products was there, and Saxo considered which of its existing products might be a “good fit” for retail investors, Douglas said in a company statement.

Gary Tiu, managing director of digital asset investment firm BC Technology Group and head of regulatory affairs, added that easing the rules to allow retail trading would “encourage tier one financial institutions to accelerate access to digital assets in Hong Kong”.

Leung’s speech comes as rival Asian financial and digital asset hub Singapore takes steps to crack down on cryptocurrency providers after establishing a relatively relaxed regulatory framework.

The Monetary Authority of Singapore has repeatedly warned against retail investment in cryptocurrencies and worked to limit retail access to the asset class.

In January, it issued new guidelines banning digital payment token service providers from nearly all forms of public advertising outside of their own websites, mobile apps and social media accounts.

In contrast, Australian regulators have led the way in the region on retail crypto ETFs, with the first bitcoin and ether-based products launching in May.

Fidelity became the first major global asset manager to offer an exchange-traded product physically backed by bitcoin in Hong Kong last week, although the product is only available to professional investors.

“The crypto community has long believed that regulation inhibits innovation, limiting fintech development and thus investor choice,” SFC’s Leung said in his keynote speech.

But she added that this argument had been challenged by recent events in the cryptocurrency space, including the collapse of Luna and Terra in May, and the subsequent bankruptcy of Three Arrows Capital.

“The withdrawals of certain crypto-firms threaten not only their own well-being, but also that of investors and the entire crypto-ecosystem,” she claimed, noting that the total market capitalization of crypto-assets had shrunk from $3tn a year ago to $1tn currently.

“The crypto winter has strengthened the resolve of global financial regulators to regulate crypto asset service providers,” she added.

Leung also announced that the regulator was preparing to “adjust our regulatory response and allow retail access” to the security token offering, provided certain safeguards were in place.

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