Hong Kong has announced its readiness to accept applications for spot crypto exchange-traded funds (ETFs). The Securities and Futures Commission (SFC), Hong Kong’s financial watchdog, alongside the Hong Kong Monetary Authority, the city’s central banking institution, jointly published circulars today, laying the groundwork for this significant shift in the crypto landscape.
The move marks a decisive step in Hong Kong’s efforts to position itself as a leading hub for digital asset innovation and regulation. The SFC’s readiness to consider applications for spot crypto ETFs signals a progressive approach to embracing the growing interest in digital assets.
The regulator has specified that these ETFs should primarily focus on investments directly in spot virtual asset tokens available to the Hong Kong public on SFC-licensed virtual asset trading platforms (VATPs).
Hong Kong Sets High Standards For Crypto ETFs
The SFC has outlined detailed requirements for the management of these financial products. To ensure robust regulatory compliance, transactions executed by the ETFs must occur through SFC-licensed crypto platforms or authorized financial institutions.
This measure aims to bring a higher level of security and legitimacy to the crypto trading ecosystem in Hong Kong. Additionally, in a move that adds flexibility to the operation of these ETFs, the SFC has stated that both in-kind and in-cash subscription and redemption methods will be permitted for SFC-authorised spot virtual asset ETFs.
The implication is that these ETFs will have greater operational versatility, catering to a broader investor base and providing more options in terms of investment strategies.
The SFC stipulates that for digital asset custody, the fund’s trustee or custodian must exclusively assign the responsibility of crypto custody to an SFC-licensed Virtual Asset Trading Platform (VATP) or to organizations that comply with the crypto custody guidelines established by the Hong Kong Monetary Authority (HKMA).
This requirement underscores the regulator’s commitment to safeguarding investor assets against the unique risks associated with digital asset custody.
When valuing spot virtual assets, the SFC advises fund management companies to utilize an “indexing approach” that reflects “virtual asset trade volume across major trading platforms.” This methodology aims to provide a more accurate and fair market value for the assets held by the ETFs.
US SEC’s Anticipated Approval Of Spot Bitcoin ETFs
The global crypto market is also closely monitoring developments in the United States, where the SEC is expected to make a pivotal decision on spot Bitcoin ETFs. Bloomberg analyst James Seyffart has expressed optimism that the SEC will greenlight a spot Bitcoin ETF as early as January 2024.
Recent amendments to spot ETF proposals in the US, including BlackRock’s latest update to accept cash redemptions, indicate the industry’s willingness to adapt to regulatory requirements. Seyffart revealed that this readiness to embrace a cash-only model might be critical for securing US Securities and Exchange Commission (SEC) approval.
Will be interesting to see who updates their documents after this. SEC might not be comfortable with a Prime Execution Agent (a 3rd party buying and selling bitcoin on behalf of the ETF) purchasing the #Bitcoin in the cash model . This is how BlackRock’s is planned at moment: https://t.co/pGWUNp7Lw3 pic.twitter.com/2D60KX7OUI
— James Seyffart (@JSeyff) December 21, 2023
Seyffart anticipates that some issuers who fail to adopt this model might be “left behind” in the rapidly evolving ETF landscape.
Notably, the potential approval of these spot ETFs, both in Hong Kong and the US, could signal a new era in the digital asset market, offering investors regulated vehicles to gain exposure to cryptocurrencies. This development is also a testament to the growing acceptance of digital assets in mainstream finance
Featured image from Unsplash, Chart from TradingView
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