Hong Kong Regulators Issues Guidelines in Spot Bitcoin ETF Approval
Hong Kong’s financial watchdog has issued guidelines for spot bitcoin exchange-traded funds (ETFs), distinguishing itself from the U.S. SEC by allowing cash and in-kind creation models. The Hong Kong financial regulator’s strategy contrasts with the U.S. SEC approach on the exclusive use of the cash creation model for Spot Bitcoin ETFs.
The Hong Kong Securities and Futures Commission (SFC) released a notice on December 22 concerning “authorized funds with exposure to virtual assets.” This circular outlines the conditions under which the SFC would approve investment funds with over 10% of their net asset value (NAV) in virtual assets (VAs) for public offering in Hong Kong.
The SFC observed the rapid evolution of the virtual asset landscape globally, with an increasing variety of investment products, including crypto ETFs, becoming available to retail and professional investors.
Hong Kong’s Growing Demand for Crypto ETFs
The growing demand for these products in Hong Kong prompted the SFC to establish frameworks to offer certain VA products to the public, ensuring adequate investor protection.
Since October of the previous year, the SFC has been processing applications for ETFs, primarily investing in crypto assets through futures contracts.
Additionally, since June 2023, the SFC’s licensing system for virtual asset trading platforms (VATPs) has been operational, allowing Hong Kong investors to access large-cap spot VAs directly, subject to specific criteria and strong investor protection measures.
The SFC mandates that spot crypto transactions and purchases by SFC-authorized funds must be conducted via SFC-licensed crypto trading platforms or approved financial institutions, adhering to the Hong Kong Monetary Authority (HKMA) regulations.
The regulator highlighted the allowance of in-kind and in-cash subscriptions and redemptions for SFC-authorized spot VA ETFs.
While Hong Kong is advancing spot bitcoin ETFs using cash and in-kind approaches, the U.S. SEC strictly adheres to the cash creation model.
The U.S. regulator has reportedly set a deadline for Spot Bitcoin ETF applicants to update their filings for consideration in the first round of decisions due in early January 2024.
Crypto Landscape in Hong Kong
Hong Kong, traditionally a center of financial innovation and a key participant in international financial markets, possesses a robust regulatory structure for conventional financial products. Recently, it has adopted an active stance in overseeing the cryptocurrency market.
Over the past few years, Hong Kong has introduced various measures to promote the expansion of its cryptocurrency sector. This includes creating a licensing system for crypto exchanges, setting up a regulatory sandbox for fintech newcomers, and initiating a government-supported blockchain research facility.
Future Outlook for Hong Kong
Launching the cryptocurrency ETF market in Hong Kong marks a significant advancement for the sector. It indicates a growing acceptance of cryptocurrencies by regulatory bodies worldwide, demonstrating their readiness to establish guidelines for their integration.
This development is expected to positively influence the international cryptocurrency market by introducing new liquidity and drawing more institutional investors. This could significantly reduce the volatility typically associated with cryptocurrencies and pave the way for creating innovative crypto-based products and services.
However, despite regulatory approval from the SEC, the cryptocurrency field remains unregulated mainly and is characterized by significant volatility. Furthermore, ETFs, by their nature, are not as accessible as decentralized, permissionless platforms.
The journey towards broader acceptance and adoption of cryptocurrency will involve navigating various conflicts and risks, requiring optimism and confidence to overcome these challenges.
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