Retail investors in Hong Kong may soon have access to exchange-traded funds (ETFs) that follow cryptocurrency futures, as the Securities and Futures Commission there has signaled that it may permit such ETFs to start on the grounds that investor protections are becoming more sophisticated.
SFC Deputy CEO and Executive Director of Intermediaries Julia Leung said that the regulator was “actively seeking to establish a system to authorize ETFs that supply mainstream virtual assets with suitable investor guardrails.”
At the recent Hong Kong FinTech Week, Leung said that initially the SFC would only let ETFs invest in bitcoin futures and ether futures traded on the Chicago Mercantile Exchange.
The new announcement comes after the SFC and the Hong Kong Monetary Authority released a joint circular in January saying that retail investors in Hong Kong may be able to access a “limited range” of products related to virtual assets.
Leung called the need for professional investors in crypto assets the “elephant in the room,” stating that the SFC first implemented this requirement as part of its virtual asset framework four years ago, when the crypto asset market in the territory was still in its infancy.
Due to the increased risks associated with the asset class and the absence of regulation surrounding some platforms or managers in the area, the SFC first published regulations on virtual assets in November 2018, limiting access to virtual asset-based funds to professional investors.
Due to “the novelty of our system and the significant volatility of crypto assets,” she said, “we decided it was reasonable to implement an overarching “professional investor” limitation.”
More global financial institutions and service providers have entered this market and provided institutional-grade infrastructure in Hong Kong’s crypto asset ecosystem during the previous four years, leading to “significant progress.” She said that the regulator has grown and become better able to watch over exchanges for virtual assets and investment businesses over this time period.
“We now think that some of the early worries about virtual asset futures ETFs are manageable and can be solved with enough safeguards,” Leung said.
She also said, “Now is a good moment to reconsider the “professional investor only” rule.”
Richard Douglas, chief executive of Saxo Markets in Hong Kong, says that Hong Kong needs cryptocurrency exchange-traded funds (ETFs) for local retail investors in order to “restore its credentials as a finance hub and attract more talent to the city after a few hard years.”
Douglas, in a corporate statement, acknowledged that there was interest from retail customers in cryptocurrency products and that Saxo was evaluating whether its offerings would “be a suitable match” for retail investors.
“Urge tier-one financial institutions to expedite entrance into digital assets in Hong Kong,” said Gary Tiu, executive director and head of regulatory relations at BC Technology Group, a business that invests in digital assets.
Leung’s address is timely, as a competing digital asset and financial center in Asia. After building a lenient regulatory environment in the beginning, Singapore is now taking action to tighten down on cryptocurrency suppliers.
The Monetary Authority of Singapore has warned the public more than once not to invest in cryptocurrencies, and it has worked hard to limit these kinds of transactions.
In January, it put out new rules that said providers of digital payment token services couldn’t advertise their services anywhere but on their own websites, mobile apps, and social media profiles.
When it comes to retail crypto ETFs, however, Australian authorities have been regional leaders since May, when the first products based on bitcoin and ether were introduced.
Last week in Hong Kong, Fidelity made history by becoming the first significant global asset management firm to provide an exchange-traded product physically backed by bitcoin, but only to institutional clients.
In her keynote speech, SFC CEO Leung said, “The crypto community has thought for a long time that regulation slows down innovation, which limits the growth of fintech and, in turn, gives investors less choice.”
But she went on to say that recent occurrences in the cryptocurrency field, including the falls of Luna and Terra in May and the subsequent bankruptcy of Three Arrows Capital, have cast doubt on this claim.
She pointed out that the whole market capitalization of crypto assets had decreased from $3tn a year ago to $1tn at present and warned that “the excesses of select crypto enterprises risk not only their own wellness but also that of investors and the entire crypto ecosystem.”
She went on to say that the “crypto winter” has made financial authorities across the world more determined to supervise those who deal in digital currencies.
Leung also said that the agency was planning to “change our regulatory response and allow retail access” to security token offers, as long as certain protections were in place.