Hong Kong’s new rules aim to increase mainstream acceptance of cryptocurrencies through cryptocurrency ETFs.
Hong Kong’s Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) have published new rules addressing the possibility for investment funds, brokerage firms and asset managers to offer cryptocurrency ETFs.
Exchange-traded funds (ETFs) are investment funds that trade on a stock exchange, similar to stocks. Cryptocurrency ETFs track the price of one or more cryptocurrencies. Investing in crypto ETFs can appeal to retail and institutional investors looking to enter the crypto market while avoiding some of the risks of directly owning crypto assets. For example, crypto ETF investors don’t need to personally manage the security or custody of crypto wallets.
Instead, ETF providers handle the storage and security of the underlying cryptocurrencies on behalf of investors. Offering crypto ETF trading provides a regulated avenue for the mainstream financial community to enter the crypto industry.
In a joint notice titled “Joint Notice on Virtual Asset-Related Activities of Intermediaries,” the regulators explained the decision:
“The SFC and the HKMA have reviewed the existing policy for intermediaries that wish to engage in virtual asset-related activities (VA-related activities). The updated policy reflects the latest market developments, including the SFC’s authorisation of VA futures ETFs, and its readiness to accept applications from other funds involving virtual assets, such as virtual asset spot exchange-traded funds (VA spot ETFs).”
Virtual assets (VAs), as defined by the Financial Action Task Force (FATF), are digital representations of value that can be traded or transferred digitally and used for payment or investment purposes.
Under the updated policy, brokerages can introduce licensed cryptocurrency trading platforms to clients for direct investment or establish omnibus accounts on the platforms to conduct VA transactions on behalf of clients. The rules are designed to address the risks of crypto asset price volatility and set standards around the custody of client digital assets.
The regulator requires intermediaries to continue to meet existing conduct requirements when handling crypto assets and comply with anti-money laundering rules. The regulator gave businesses a three-month transition period to implement the new cryptocurrency policy.
Hong Kong’s move puts it ahead of developments in the U.S. cryptocurrency market, where financial regulators have yet to approve a bitcoin ETF despite widespread speculation and anticipation that such products are imminent. As global institutional investors increasingly express interest in gaining regulated exposure to crypto assets, Hong Kong’s policy shift positions it to lead that demand in Asia.