Hong Kong‘s financial landscape is poised for a significant shift as the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority jointly announce their readiness to accept applications for spot crypto ETFs. In a comprehensive circular released today, both regulatory bodies outlined the adjusted policies for intermediaries engaging in virtual asset-related activities.

Expanded Scope for Virtual Asset Exposure

The SFC, in a bid to foster innovation, declared its willingness to consider applications for the authorization of funds with exposure to virtual assets, specifically opening the door for virtual asset spot exchange-traded funds (VA spot ETFs). This move broadens the scope beyond existing crypto futures ETFs.

Stringent Requirements Ensure Regulatory Compliance

While embracing the evolving landscape, the SFC sets forth strict requirements for funds seeking direct investment in spot virtual assets accessible to the Hong Kong public. The circular mandates transactions through SFC-licensed crypto platforms or authorized financial institutions. The regulator allows both in-kind and in-cash subscriptions and redemption for SFC-authorized spot VA ETFs.

Custody and Valuation Standards

Addressing critical aspects of custody and valuation, the SFC emphasizes that the trustee or custodian of the fund must delegate crypto custody functions exclusively to SFC-licensed VATPs or those meeting HKMA’s crypto custody standards. The valuation of spot virtual assets should adopt an indexing approach based on trade volume across major trading platforms.

Consultation Required for Significant Crypto Exposure

To maintain prudential oversight, the circular stipulates that funds intending to expose more than 10% of their net asset value to crypto must engage in prior consultation with the SFC. This measure underscores a commitment to responsible and measured adoption of cryptocurrency exposure.

Hong Kong’s Crypto-Friendly Stance

In stark contrast to the broader cryptocurrency crackdown witnessed in mainland China, Hong Kong continues to position itself as a welcoming hub for crypto activities. The city has actively encouraged collaboration with crypto firms and, in October 2022, initiated a comprehensive crypto licensing regime for virtual asset trading platforms.

Hong Kong’s regulatory openness is evident as it takes steps to welcome spot crypto ETFs, aligning with its commitment to fostering innovation and efficiency in the financial sector. The move signals a positive stance toward the integration of cryptocurrencies into the mainstream financial landscape, positioning Hong Kong as a potential pioneer in approving crypto spot ETFs on a developed financial market.