SFC issued the “Circular on the Approval of Funds Investing in Virtual Assets by the Securities and Futures Commission” yesterday, emphasizing the importance of asset segregation and private key management. It requires trustees and custodians to separately store their own assets and assets held for other clients, and private keys must be securely stored locally in Hong Kong.
(Client and Platform Asset Segregation)
(Private Keys must be securely stored locally)
The CEO of the Securities and Futures Commission (SFC) in Hong Kong, Ashley Alder, stated on November 6th that Hong Kong is actively considering opening up cryptocurrency spot ETFs to retail investors, subject to regulatory standards.
Yesterday (22nd), SFC and the Hong Kong Monetary Authority jointly issued a “Circular on Intermediaries’ Activities in Relation to Virtual Assets.” The circular stated that in addition to existing cryptocurrency futures ETFs, Hong Kong plans to accept authorization applications for “other funds related to virtual assets,” including cryptocurrency spot ETFs.
At the same time, SFC’s circular on funds investing in virtual assets provides clear guidelines on the security management measures for trustees/custodians and their responsible persons of cryptocurrency spot funds. These measures indicate that Hong Kong may approve the recently highly anticipated Bitcoin spot ETF.
Firstly, regarding asset segregation, trustees/custodians must ensure that virtual assets are kept separate from their own assets and assets held for other clients to reduce the risk of asset misuse or unauthorized access.
In terms of the use of cold wallets and hot wallets, most virtual assets should be stored in secure cold wallets, while the amount and duration of virtual assets held in hot wallets should be minimized and only used for necessary subscription and redemption operations.
Secondly, the secure storage of private keys and mnemonic phrases is crucial. These critical information should be securely stored locally in Hong Kong, with strict restrictions on authorized personnel’s access to them.
To prevent potential speculation or collusion, private keys should be generated through non-deterministic methods (such as random number generators) and measures like multi-signature and private key fragmentation should be implemented. In addition, appropriate backup measures are crucial to ensure that access to and recovery of assets are not affected even in extreme circumstances.
These regulations reflect SFC’s rigorous attitude towards virtual asset management and indicate its serious consideration of accepting cryptocurrency spot ETFs, which creates market expectations on whether Hong Kong will precede the United States in approving cryptocurrency spot ETFs.
Regarding SFC’s regulation of cryptocurrency spot ETFs, the following requirements are listed:
– Virtual asset transactions related to spot ETFs should be conducted through virtual asset trading platforms (VATPs) licensed by the SFC or authorized financial institutions.
– Such ETFs allow subscriptions and redemptions in the form of physical assets and cash.
– As for custody, the fund’s custodial service providers can only entrust custody to VATPs licensed by the SFC or financial institutions that comply with the Hong Kong Monetary Authority’s cryptocurrency custody standards.
– For the valuation of virtual assets, fund management companies should adopt an index-based approach based on the trading volume of virtual assets on major trading platforms.
– Funds planning to hold more than 10% of their net assets in cryptocurrencies should seek the SFC’s management opinion in advance.
Regarding the SFC and the Hong Kong Monetary Authority’s openness towards cryptocurrency spot ETFs, Jason Chan, a partner at Howse Williams law firm in Hong Kong, stated:
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Tags:
ETF
SFC
Ashley Alder
Spot ETF
Hong Kong