Hong Kong says it’s ready to accept spot crypto ETF applications

Hong Kong is getting ready to pave the way for spot crypto ETFs, with its financial regulator saying today that it is prepared to start accepting such applications.

In a joint circular published today, the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority, the city’s de facto central bank, said that both agencies have reviewed their existing policy for intermediaries that wish to engage in virtual asset-related activities.

In addition to existing crypto futures ETFs, the SFC said it is “prepared to accept applications for the authorization of other funds with exposure to virtual assets, including virtual asset spot exchange-traded funds (VA spot ETFs).”

In a separate circular released today, the SFC sets out the requirements for funds to “invest directly in the same spot VA tokens accessible to the Hong Kong public for trading on SFC-licensed virtual asset trading platforms (VATPs).”

Unlike its neighboring Chinese mainland’s broader crackdown on cryptocurrency trading and mining, Hong Kong has rolled out the welcome mat for crypto firms this year — even going so far as encouraging banks to work with them.

“They are very welcoming to the crypto industry and would potentially be one of the first to approve a crypto spot ETF by a developed financial market,” Jason Chan, partner of Hong Kong-based law firm Howse Williams, told The Block.

In October 2022, Hong Kong authorities released a series of policy statements about cryptocurrencies to strengthen its position as a global financial center. In June, Hong Kong officially started its crypto licensing regime for virtual asset trading platforms, allowing licensed exchanges to offer retail trading services.

Julia Leung, chief executive officer of Hong Kong’s SFC, said in November that the regulator was assessing spot crypto ETFs as it welcomes “proposals using innovative technology that boosts efficiency and customer experience.” Hong Kong has currently listed several futures-based crypto ETFs — Samsung Bitcoin Futures Active ETF, CSOP Bitcoin Futures ETF and CSOP Ether Futures ETF.

Strict requirements

The SFC noted in the circular that transactions of crypto made by such ETFs should be carried out through SFC-licensed crypto platforms or authorized financial institutions.

“Both in-kind and in-cash subscription and redemption are allowed for SFC-authorised spot VA ETFs,” the regulator added.

When it comes to custody, the SFC said that the trustee or custodian of the fund should only delegate its crypto custody function to an SFC-licensed VATP or those that meet the crypto custody standards issued by the HKMA.

For the valuation of spot virtual assets, the management companies of the fund “should adopt an indexing approach based on VA trade volume across major VA trading platforms,” the regulator continued.

Prior consultation with the SFC is required for funds intending to have crypto exposure of more than 10% of its net asset value, according to the circular.