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Hong Kong is currently in the process of evaluating the possibility of allowing exchange-traded funds Crypto ETFs that directly invest in cryptocurrencies, as part of its efforts to solidify its position as an Asia-Pacific digital asset hub. Simultaneously, the city is grappling with the repercussions of the JPEX scandal, underscoring the need for a regulatory framework to govern the digital asset sector.
The consideration in Hong Kong revolves around granting retail investors access to spot ETFs, provided that stringent regulatory concerns are addressed. Julia Leung, Chief Executive Officer of the Securities and Futures Commission (SFC), discussed this development in her first international media interview since taking office on January 1, stating, “We welcome proposals using innovative technology that boosts efficiency and customer experience. We’re happy to give it a try as long as new risks are addressed. Our approach is consistent regardless of the asset.”
The cryptocurrency industry views ETFs as a means of mainstreaming digital assets, as these funds are more readily accessible to a diverse range of investors. The surge in Bitcoin’s value, having increased by 110% this year, is partly attributed to the expectation that financial giants like BlackRock Inc. will soon receive approval to launch the first US-based spot ETFs for the cryptocurrency.
As of now, both Hong Kong and the United States allow futures-based crypto ETFs; however, their adoption has been modest compared to the broader fund industry. In Hong Kong, the Samsung Bitcoin Futures Active, CSOP Bitcoin Futures, and CSOP Ether Futures ETFs are listed, with combined assets totaling around $65 million. The popularity of spot funds remains uncertain, especially in the wake of the 2022 digital asset market downturn and the conviction of Sam Bankman-Fried for a multibillion-dollar FTX fraud, which adversely affected the reputation of the crypto industry.
To bolster its standing as a cutting-edge financial center, Hong Kong introduced a dedicated regulatory framework for virtual assets in June. These regulations aim to attract companies while prioritizing investor protection, as highlighted by the recent HK$1.6 billion ($204 million) fraud case at the unlicensed JPEX crypto exchange.
Under the SFC’s digital asset regulations, retail investors can trade major tokens like Bitcoin and Ether on licensed exchanges, with BC Technology Group Ltd.’s OSL and HashKey Exchange being the sole platforms currently holding crypto permits in Hong Kong. Mandatory regulations for stablecoins, crypto tokens designed to maintain a stable value, are expected to be introduced between 2023 and 2024.
Additionally, officials in Hong Kong are exploring tokenization, which involves creating digital representations of real-world assets using blockchain technology. In February, Hong Kong issued its inaugural digital green bonds, and the SFC recently updated its regulatory guidance to pave the way for tokenized products accessible to retail investors.
Julia Leung indicated, “As the crypto ecosystem evolves step-by-step to the point where we’re comfortable, then we’re happy to open up more access to the wider investing public.” The SFC’s latest circulars, released on November 2, provide a roadmap for issuing tokenized funds and bonds to retail investors, with expectations of experimentation with various levels of tokenization.
A significant development is the removal of restrictions on security token offerings, previously limited to professional investors, as outlined in the latest circular. Tokenized securities are essentially traditional securities enveloped in a tokenized form, according to the regulator.
The Hong Kong Monetary Authority, the city’s central bank, is also exploring the provision of guidance to banks regarding digital asset custodial services, which are crucial for developing a robust digital asset ecosystem.
Citigroup Inc. forecasts that by 2030, there could be up to $5 trillion worth of tokenized private-sector securities and funds, covering corporate debt, financing collateral, and alternative assets such as real estate, private equity, and venture capital.
Hong Kong is among several jurisdictions striving to establish digital asset hubs as the industry steadily recovers from the $1.5 trillion market crash that occurred last year. Competitors in this endeavor include Singapore, Dubai, and the European Union, while the United States has implemented a regulatory crackdown.
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