Hong Kong Financial Regulator Getting Ready to Allow Spot Crypto ETFs

In a joint statement on December 22, Hong Kong’s Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority, the city’s de facto central bank, declared their readiness to accept applications for spot cryptocurrency ETFs. Both entities have reviewed their existing policies for intermediaries engaged in virtual asset-related activities.

The SFC has signalled its openness to consider applications for the approval of various funds, including Virtual Asset Spot exchange-traded funds (VA Spot ETFs), alongside the already existing cryptocurrency futures ETFs.

In a subsequent circular issued on December 22, the SFC outlines the criteria for funds to “directly invest in identical spot Virtual Asset (VA) tokens available to the Hong Kong public on SFC-licensed Virtual Asset Trading Platforms (VATPs).”

The SFC highlighted that cryptocurrency transactions executed by these ETFs must take place through crypto platforms licensed by the SFC or authorised financial institutions. The regulatory body further stated that in-kind and in-cash subscriptions and redemptions are acceptable for SFC-authorised spot Virtual Asset (VA) ETFs.

In terms of custody, the SFC clarified that the fund’s trustee or custodian should only assign its crypto custody function to a Virtual Asset Trading Platform (VATP) licensed by the SFC or those complying with the crypto custody standards established by the HKMA.

For the assessment of spot virtual asset value, the fund’s management companies are advised to employ an indexing approach based on the trade volume of virtual assets across major trading platforms, as stated by the regulator. The circular specified that funds intending to expose more than 10% of their net asset value to cryptocurrencies must engage in prior consultation with the SFC.

In contrast to the prevailing crackdown on cryptocurrency activities in mainland China, Hong Kong has welcomed crypto firms this year, actively promoting collaboration with banks.

In October 2022, Hong Kong issued policy statements on cryptocurrencies to strengthen its position as a global financial hub. In June, the city launched its licensing system for cryptocurrencies, allowing licensed exchanges to offer retail trading services.