While US investors speculate on the timetable for crypto ETF approval, Hong Kong presses forward with its regulatory framework for such investment vehicles. Earlier in December, the Securities and Futures Commission (SFC) in Hong Kong released a circular in collaboration with the Hong Kong Monetary Authority. This announcement includes information about the requirements that the securities regulator will impose on exchange-traded funds with more than 10% crypto holdings.
The regulators noted in the joint circular that the investment vehicle within the cryptocurrency landscape has been changing rapidly, and the demand for these products has surged rapidly and exponentially in Hong Kong.
According to the joint circular, spot cryptocurrency investment products must fulfill all the requirements that regulators in Hong Kong have made for structured investment vehicles such as mutual funds.
Additionally, product issues must also have an excellent track record with regard to regulatory compliance, according to the SFC, and must also employ a minimum of one competent member with years of experience in virtual asset management and other related products.
Furthermore, the regulators want to create a number of virtual tokens that will be legal to hold and use for spot trading on cryptocurrency exchanges that have received approval from the Hong Kong government and regulators.
The products will not be allowed to have any leveraged exposure, while the issuers need to work with the Hong Kong-approved and regulated exchanges to purchase and trade assets, as stated by the SFC. These requirements have been made due to the continuous increase of Hong Kong’s regulatory presence within the cryptocurrency industry.
After receiving first approval from the US Securities and Exchange Commission in 2021, the SFC started considering applications for crypto futures ETFs in October 2022. Following this, Hong Kong began its new cryptocurrency exchange licensing program in 2023, allowing Hong Kong investors to get access to large-cap virtual asset spot trading. Guidelines for these products were also issued months after the Hong Kong Monetary Authority and the SFC amended regulatory standards to allow experienced and professional investors to access select virtual digital currency offers.
The rules later made international cryptocurrency ETFs inaccessible to regular retail investors. The measures were implemented in an attempt by regulators to manage the fallout from a famous cryptocurrency exchange based in Hong Kong, JPEX, which was embroiled in a huge controversy involving $200 million after luring investors with false promises of high returns of 20%. The exchange has halted withdrawals despite regulatory warnings, leaving some investors, including those who contributed their life savings, with significant losses and in severe situations.