Hong Kong’s Regulator Invites Applications for Spot Crypto ETFs

In a Friday, December 22 statement, Hong Kong’s securities regulator declared it’s open to considering bids for spot Bitcoin exchange-traded fund (ETF). 

The Securities and Futures Commission (SFC) declared that all crypto-related transactions are a preserve for the licensed crypto platforms. Also, the SFC indicated that only authorized financial institutions can execute the crypto transactions. 

Hong Kong Affirms Readiness for Spot Crypto ETF Applications

The move by the SFC signals Hong Kong’s readiness to welcome applications for spot crypto ETFs. The initiative coincides with a period when the US regulator edges closer to the final review of a dozen bids, with a potential approval date projected in January. 

In an announcement on Friday, December 22, Hong Kong’s regulator indicated that it’s prepared to receive applications for crypto ETFs.

The SFC and the Hong Kong Monetary Authority (HKMA), the administrative region’s central bank, issued a collaborative statement confirming they had finalized revising their policy guidelines for the intermediaries executing virtual-related activities. 

The SFC iterated its readiness to accept bids from applicants pursuing authorization for current crypto futures ETFs alongside the virtual asset spot ETFs (VA Spot ETFs).

In an earlier circular issued on Friday, December 22, the SFC outlined a clear guideline for the funds mandating direct investment within the similar spot virtual asset (VA) tokens accessible to the public via the virtual asset trading platforms (VATPs) licensed by the SFC.

The SFC restricted all crypto-related transactions to the authorized TradFi institutions and crypto platforms. In contrast to the recent directive by the US SEC urging the exclusion of in-kind creation and redemption models, the SFC is adopting a more permissible approach. In particular, the regulator confirmed accepting in-kind, in-csh subscriptions and redemptions for all authorized spot VA ETFs. 

The SFC clarified that the virtual fund’s custodian and trustee can delegate the crypto custody function only to the licensed VATPs. Also, entities that satisfy the crypto custody standards outlined by the HKMA can trust the custodian function.

SFC Mandates Indexing Approach to Value Spot Virtual Assets

The SFC directed that the fund’s management firms should embrace the indexing approach for valuing the spot virtual assets. However, the indexing should be pegged to the VA trade volume across leading VA trading platforms. 

The circular directed that all funds intending to realize the crypto exposure exceeding 10 % of net asset value should consult with the SFC.

The proactive move by the regulators within Hong Kong contrasts with the intense crackdown on crypto-related activities within mainland China. The crypto-friendly approach illustrated by Hong Kong has some marker observers projecting the receptive nature to serve as an experiment for Beijing.

Hong Kong has actively portrayed a receptive profile for crypto firms in 2023, particularly in pursuing collaboration with the banks. 

Hong Kong’s crypto-friendly stance traces to October 2022, when it issued policy statements to enhance the status of the global financial hub. 

Hong Kong unveiled a harmonized crypto licensing system targeting virtual asset trading platforms in June. The move targets facilitating exchanges in offering retail trading services. 

Hong Kong Preparedness for Mixed Market Structure

Hong Kong’s preparedness for spot crypto ETFs arises from the awareness of mixed market structure as traditional financial institutions realize exposure to digital assets. Such is inevitable in the coming year as more products are adopted as mainstream constituents of finance. 

Besides acquiring cryptocurrencies, Tradfi entities have recently embraced real-world assets tokenization. The initiative is steered by large TradFi institutions now deploying blockchains as technical solutions. 

The Hong Kong regulators project the crypto ecosystem to realize a large inflow of institutional investors via wealth managers and digital asset funds. Such an outcome manifests in Hong Kong’s regulators’ resolve to nurture a strong partnership between DeFi and TradFi. 

A leading factor for Hong Kong’s move is learning from the issues in deliberations between the US SEC and spot Bitcoin ETF applicants. Still, Hong Kong’s positioning seems optimistic that spot Bitcoin ETF approval in January will offer a unique window for the TradFi funds to flow into the DeFi ecosystem.