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Hong Kong is ‘actively looking’ at authorising crypto ETFs

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Hong Kong’s Securities and Futures Commission looks poised to allow the launch of exchange-traded funds tracking cryptocurrency futures for retail investors, citing the increasing sophistication of investor protection measures.

Julia Leung, deputy chief executive and executive director of intermediaries at the SFC, said the regulator was “actively seeking a regime to authorize ETFs that provide mainstream virtual assets with appropriate investor guardrails”.

In the initial stages, the SFC will only allow ETFs that invest in bitcoin futures and ether futures traded on the Chicago Mercantile Exchange, Leung said during her keynote speech at Hong Kong FinTech Week last week.

The latest communication follows a joint circular from the SFC and the Hong Kong Monetary Authority in January this year which said a “limited range” of products linked to virtual assets could be allowed for Hong Kong retail investors.

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This article was previously published by Ignites Asia, a title owned by the FT Group.

Describing the existing professional investor requirement for crypto-asset investments as the “elephant in the room”, Leung noted that when the SFC introduced this requirement four years ago as part of its virtual assets framework, the area’s crypto-asset industry was still relatively new. wash.

In November 2018, the SFC first issued rules on virtual assets that limit access to virtual asset-based funds to professional investors due to the increased risks associated with the asset class, as well as the lack of regulation around certain platforms or managers in the space.

“Given the novelty of our framework and the high volatility of crypto-assets, we believed it prudent to introduce an overarching ‘professional investor’ restriction,” she said.

However, Hong Kong’s crypto-asset ecosystem has made “significant progress” over the past four years, with more global financial institutions and service providers entering this space and providing institutional-grade infrastructure. During this time, the regulator gained more experience in regulating virtual asset trading platforms and fund firms, she argued.

“We have come to believe that some initial concerns about virtual asset futures ETFs have become manageable and can be addressed with proper safeguards,” Leung said.

“Now is an opportune time to review the ‘professional investor only’ requirement,” she added.

Richard Douglas, Hong Kong CEO at Saxo Markets, said opening up crypto-based ETFs to local retail investors would help Hong Kong “restore its credentials as a financial center and attract more talent to the city after a difficult few year.” .

The demand from retail clients for crypto products was there, and Saxo was determining which of its existing products were “a good fit” for retail investors, Douglas said in a company statement.

Gary Tiu, executive director of digital asset investment firm BC Technology Group and head of regulatory affairs, added that a relaxation of rules to allow retail access “will encourage tier-one financial institutions to access digital assets in Hong Kong to accelerate”.

Leung’s speech comes as rival Asian financial and digital assets hub Singapore moves to crack down on cryptocurrency providers after initially establishing a relatively relaxed regulatory framework.

The Monetary Authority of Singapore has repeatedly warned against retail investments in cryptocurrencies and worked to limit retail access to the asset class.

In January, it released new guidelines that prohibit digital payment token service providers from using almost all forms of public advertising outside of their own websites, mobile apps and social media accounts.

In contrast, Australian regulators have led the way in the region when it comes to retail crypto ETFs, with the first bitcoin and ether-based products launched in May.

Fidelity last week became the first major global asset manager to offer an exchange-traded product physically backed by bitcoin in Hong Kong, although the product is only available to professional investors.

“The crypto community has long believed that regulation inhibits innovation, limiting fintech development and therefore investor choice,” the SFC’s Leung said in her speech.

But she added that this argument has been challenged by recent events in the cryptocurrency space, including the collapse of Luna and Terra in May, and the subsequent bankruptcy of Three Arrows Capital.

“The excess of certain crypto-firms threatens not only their own well-being, but also that of investors and the entire crypto-ecosystem,” she argued, noting that the total market capitalization of crypto-assets from $3tn a year ago to $1tn has currently shrunk.

“The crypto winter has strengthened the resolve of global financial regulators to regulate crypto-asset service providers,” she added.

Leung also announced that the regulator was preparing to “adjust our regulatory response and allow retail access” to security token offerings, provided certain safeguards are in place.

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