Hong Kong’s financial regulator issues guidelines for crypto futures ETFs

by · October 31, 2022

The Securities and Futures Commission of Hong Kong has set requirements for entities considering a public offering of an exchange-traded fund (ETF) linked to cryptocurrency futures.

In a circular on October 31, the SFC said that in addition to previously imposed requirements for mutual funds and unit trusts for approval of a crypto futures ETF, management companies in Hong Kong will need to “have a good record of regulatory compliance” as well as three years of experience with managing ETFs, with respect to similar investment vehicles. The financial regulator indicated that it would follow in the Chicago Mercantile Exchange’s footsteps by only allowing listings of ETFs linked to Bitcoin (BTC) and Ether (ETH) futures.

“Just [virtual asset, or VA,] Futures traded on conventional regulated futures exchanges are permitted, subject to the management company demonstrating that the relevant VA futures have sufficient liquidity for the operation of the VA Futures ETF and the roll costs of the relevant VA futures contracts are manageable and how such roll costs will be managed ,” the SFC said.

Finanstilsynet added that the net derivative exposure of any crypto futures ETF “should not exceed 100% of the ETF’s total net asset value”, and companies should expect to adopt an active investment strategy to account for events including market disruptions. The SFC also said ETF issuers should “conduct extensive investor education” before launching any crypto investment vehicle in Hong Kong.

The SFC circular came as part of a policy update by the Hong Kong government, which announced on October 31 that it was “ready to engage” with global crypto exchanges on regulatory issues. The government said it planned to launch a number of pilot projects, including those targeting non-fungible tokens, green bond tokenization and a digital Hong Kong dollar.

Christopher Hui, Hong Kong’s Secretary for Financial Services and Treasury, said:

“We recognize the potential of DLT and Web 3.0 to be the future of finance and commerce, and under the right regulation they are expected to increase efficiency and transparency. The government is prepared to embrace this future and we want the clustering of Fintech and VA communities and talents welcome in Hong Kong and we will promote the sustainable development of financial services across the VA value chain.”

Related: Not like China: Hong Kong reportedly wants to legalize crypto trading

Hong Kong’s political goals would apparently set it on a different path from China, despite the fact that the political lines between the special administrative region and the bordering nation have become more blurred in recent years. The Chinese government has cracked down on crypto firms operating in the country, but continues to move forward with piloting its central bank digital currency, the digital yuan.