SFC yesterday issued a circular on the approval of fund investments in virtual assets by the Securities and Futures Commission (SFC). The circular emphasizes the importance of asset segregation and private key management, requiring trustees and custodians to hold their own assets and assets held for other clients separately, with the private keys securely stored locally in Hong Kong.
Summary:
Is Hong Kong becoming the first in Asia? What are the regulatory requirements for the SFC to approve “cryptocurrency spot ETFs”?
Background:
Hong Kong Securities and Futures Commission giving the green light: considering approving “Bitcoin spot ETFs” for retail investors if regulatory requirements are met.
Table of Contents:
Separation and Custody of Client and Platform Assets
Private Keys Must Be Securely Stored in Hong Kong
SFC’s Regulatory Requirements for Cryptocurrency Spot ETFs
Hong Kong Securities and Futures Commission (SFC) CEO, Ashley Alder, on November 6th, stated that Hong Kong is actively considering opening up cryptocurrency spot ETF investments to retail investors, subject to meeting regulatory standards.
Yesterday (22nd), the SFC and the Hong Kong Monetary Authority issued a joint circular on “intermediaries’ activities related to virtual assets.” The circular states that in addition to the current 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, in its circular on “the approval of fund investments in virtual assets,” the SFC has set out specific security management measures for trustees/custodians and their responsible persons of cryptocurrency spot funds. These measures indicate that Hong Kong may approve the highly anticipated Bitcoin spot ETF in the near future.
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 risks of asset misuse or unauthorized access.
In terms of the use of cold wallets and hot wallets, the majority of virtual assets should be stored in more secure cold wallets, while the amount and duration of virtual assets held in hot wallets should be minimized and used only for necessary subscription and redemption operations.
Secondly, the secure storage of private keys and mnemonic phrases is crucial. These key pieces of information should be securely stored locally in Hong Kong and access should be strictly limited to authorized personnel.
To prevent potential speculation or collusion, private keys should be generated in an indeterminate manner (e.g. using a random number generator) and measures such as multi-signature and private key fragmentation should be implemented. In addition, appropriate backup measures are also crucial to ensure that asset access and recovery are not affected even in extreme situations.
These regulations reflect the SFC’s rigorous attitude towards virtual asset management and indicate its serious consideration of accepting cryptocurrency spot ETFs, raising expectations as to whether Hong Kong will be the first to approve such ETFs ahead of the United States.
Regarding the SFC’s regulation of cryptocurrency spot ETFs, the following requirements are outlined:
– Virtual asset transactions involved in spot ETFs should be conducted through SFC-licensed virtual asset trading platforms (VATPs) or authorized financial institutions.
– Such ETFs allow subscription and redemption in both physical and cash forms.
– In terms of custody, the custody service provider for the fund can only entrust its custody to SFC-licensed virtual asset trading platforms 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 calculation of virtual asset trading volume used by major trading platforms.
– Fund managers planning to hold more than 10% of their net assets in cryptocurrencies need to consult the SFC for management opinions in advance.
Regarding the SFC and the Hong Kong Monetary Authority’s open attitude towards cryptocurrency spot ETFs, Jason Chan, Partner at Howse Williams, a Hong Kong law firm, stated:
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Tags:
ETF
SFC
Ashley Alder
Spot ETF
Hong Kong