Hong Kong has signaled its readiness to welcome spot cryptocurrency exchange-traded funds (ETFs), as announced by the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) on December 22. The collaborative statement affirms that the SFC is prepared to receive applications for the authorization of various funds, including virtual asset spot exchange-traded funds (VA spot ETFs), alongside existing crypto futures ETFs.


Regulatory Framework for Spot Crypto ETFs: In a circular issued on the same day, the SFC outlined specific criteria for funds seeking authorization to invest in identical spot Virtual Asset (VA) tokens available to the Hong Kong public on SFC-licensed Virtual Asset Trading Platforms (VATPs). The regulatory framework emphasizes that cryptocurrency transactions conducted by these ETFs must take place through SFC-licensed crypto platforms or authorized financial institutions.

Key Considerations for Spot Crypto ETFs: The circular details several key considerations for spot crypto ETFs, including permissible in-kind and in-cash subscriptions and redemption for SFC-authorized spot VA ETFs. Regarding custody, the SFC specifies that the fund's trustee or custodian should delegate its crypto custody function only to an SFC-licensed Virtual Asset Trading Platform (VATP) or entities meeting the crypto custody standards set by the HKMA.

Spot Virtual Asset Valuation and Exposure Limits: For spot virtual asset valuation, the SFC advises fund management companies to adopt an indexing approach based on VA trade volume across major VA trading platforms. The circular highlights that funds planning to have crypto exposure exceeding 10% of their net asset value must undergo prior consultation with the SFC.

Hong Kong's Crypto-Friendly Stance: In contrast to the stringent regulatory measures observed in mainland China, Hong Kong has maintained a more receptive stance toward cryptocurrency activities in 2023. The city actively encourages collaboration between crypto firms and banks and issued policy statements on cryptocurrencies in October 2022 to enhance its status as a global financial hub. In June, Hong Kong initiated its crypto licensing system for virtual asset trading platforms, enabling licensed exchanges to provide retail trading services.

Conclusion: Hong Kong's announcement welcoming spot cryptocurrency ETF applications reflects a progressive approach toward embracing digital assets within its financial regulatory framework. The move aligns with Hong Kong's efforts to position itself as a favorable jurisdiction for crypto-related activities, fostering innovation and collaboration while adhering to regulatory standards. As the regulatory landscape evolves, the city aims to solidify its standing as a global financial hub that accommodates the growing influence of digital assets in traditional financial markets.


(AMAKA NWAOKOCHA, COINTELEGRAPH, 2023)