Hong Kong prepares for crypto spot ETFs, takes lead in Asia

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The Securities and Futures Commission (SFC) of Hong Kong and the Hong Kong Monetary Authority (HKMA) have issued new rules addressing the possibilities of investment funds, brokerages, and asset managers to offer Crypto ETFs.

Exchange-traded funds (ETFs) are investment funds traded on stock exchanges, similar to stocks. Crypto ETFs track the prices of one or more cryptocurrencies. Investing in a crypto ETF can appeal to retail and institutional investors looking to gain exposure to the crypto market while avoiding some of the risks of owning crypto assets directly. For example, a crypto ETF investor would not need to personally manage crypto wallet security or custody. 

Instead, the ETF provider handles the storage and security of the underlying crypto on the investors’ behalf. Offering crypto ETF trading provides a regulated avenue for the mainstream financial world to access the crypto industry. 

In a joint circular titled “Joint Circular on Intermediaries’ Virtual Asset-Related Activities,” the regulators explained the decision:

“The SFC and the HKMA have reviewed their existing policy for intermediaries wishing to engage in virtual asset-related activities (VA-related activities). The updated policy reflects the latest market developments, including the SFC’s authorization of VA futures ETFs and readiness to accept applications for other funds with exposure to virtual assets, such as virtual asset spot exchange-traded funds (VA spot ETFs).”

Virtual assets (VA), defined by the Financial Action Task Force (FATF), are digital representations of value that can be digitally traded or transferred and used for payment or investment purposes. 

Under the updated policies, brokerages can introduce clients to licensed crypto trading platforms for direct investing or establish omnibus accounts on platforms to trade VA on clients’ behalf. The rules aim to address risks around crypto asset price volatility and set standards around the custody of a client’s digital assets.

The regulators require intermediaries to continue meeting existing conduct requirements when handling crypto assets and complying with anti-money laundering rules. The regulators granted firms a three-month transition period to implement the new cryptocurrency policies.

Hong Kong’s move puts it ahead of crypto market developments in the US, where financial regulators have yet to approve a bitcoin ETF despite the widespread speculation and anticipation of such a product coming to market. With global institutional investors increasingly expressing interest in gaining regulated crypto asset exposure, Hong Kong’s policy shift positions it to lead that demand in Asia. 

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