Hong Kong is actively considering the approval of crypto ETFs

Hong Kong's Securities and Futures Commission is expected to allow the launch of exchange-traded funds that track cryptocurrency futures for retail investors, citing increasing sophistication in investor protection measures.

Julia Leung, deputy chief executive and executive director of intermediaries at the SFC, said the regulator was “actively looking to establish a regime to approve ETFs that provide adequate investor protections for mainstream virtual assets.”

In the initial phase, the SFC will only allow ETFs to invest in Bitcoin futures and Ether futures traded on the Chicago Mercantile Exchange, Leung said during her keynote address at Hong Kong FinTech Week last week.

The latest notice follows a joint circular from the SFC and the Hong Kong Monetary Authority in January this year, which said a "limited suite" of products linked to virtual assets could be permitted for retail investors in Hong Kong.

Leung described the existing requirement for professional investors to invest in crypto assets as the “elephant in the room,” noting that the territory’s crypto asset industry was still relatively new when the SFC introduced the requirement as part of its virtual assets framework four years ago.

The SFC first issued rules on virtual assets in November 2018, which limited access to virtual asset-based funds for professional investors due to the increased risks associated with the asset class as well as the lack of regulation of certain platforms or managers in this area.

“Given the novelty of our framework and the high volatility of crypto assets, we felt it prudent to introduce an across-the-board restriction on ‘professional investors,’” she said.

However, Hong Kong's crypto asset ecosystem has made "significant progress" over the past four years as more global financial institutions and service providers enter the space and provide institutional infrastructure. During this time, the regulator has gained more experience in regulating virtual asset trading platforms and fund firms, she argued.

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

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

Richard Douglas, Hong Kong chief executive at Saxo Markets, said opening crypto-based ETFs to local retail investors would help Hong Kong "restore its reputation as a financial center and attract more talent to the city after a difficult few years." .

Retail demand for crypto products was there, and Saxo was evaluating which of its existing products might be “well-suited” to retail investors, Douglas said in a company statement.

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

Leung's speech comes as rival Asian financial and digital asset hub Singapore takes steps to crack down on cryptocurrency providers after initially establishing a relatively loose regulatory framework.

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

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

In contrast, Australian regulators in the region have been at the forefront of retail crypto ETFs, with the first Bitcoin and Ether-based products launching in May.

Fidelity became the first major global asset manager to offer an exchange-traded product physically backed by Bitcoin last week 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,” SFC’s Leung said in her keynote address.

However, she added that this argument has been called into question 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 excesses of certain crypto firms threaten 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 has shrunk from $3 trillion a year ago to $1 trillion currently.

“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 is preparing to “adjust our regulatory response and allow retail access to security token offerings,” subject to certain safeguards being in place.