Hong Kong financial regulator issues guidelines for crypto futures ETFs

The Securities and Futures Commission of Hong Kong has set up requirements for entities considering a public offering of an exchange-traded fund (ETF) tied to cryptocurrency futures.

In an Oct. 31 circular, the SFC said that in addition to previously imposed requirements on unit trusts and mutual funds for authorization of a crypto futures ETF, management companies in Hong Kong would need to “have a good track record of regulatory compliance” as well as three years of experience managing ETFs, with consideration for similar investment vehicles. The financial regulator hinted it would follow in the Chicago Mercantile Exchange’s footsteps by only initially allowing listings of ETFs linked to Bitcoin (BTC) and Ether (ETH) futures.

“Only [virtual asset, or VA,] futures traded on conventional regulated futures exchanges are allowed, subject to the management company demonstrating that the relevant VA futures have adequate liquidity for the operation of the VA Futures ETF and the roll costs of the relevant VA futures contracts are manageable and how such roll costs will be managed,” said the SFC.

HKEX welcomes the SFC’s announcement today permitting the listing of ETFs with virtual assets as their underlying. This will support the continued growth of #HongKong as Asia’s premier #ETF marketplace, further strengthening Hong Kong’s role as an international financial centre. pic.twitter.com/zLRgAUV6iX

— HKEX 香港交易所 (@HKEXGroup) October 31, 2022

The financial regulator added that the net derivative exposure of any crypto futures ETF “shall not exceed 100% of the ETF’s total net asset value,” and companies should expect to adopt an active investment strategy to account for incidents including market disruptions. The SFC also said ETF issuers were to “carry out extensive investor education” before the launch of any crypto investment vehicle in Hong Kong.

The SFC circular came as part of a policy update from Hong Kong’s government, which announced on Oct. 31 that it was “ready to engage” with global crypto exchanges on regulatory issues. The government said it planned to launch a number of pilot projects, including those aimed at nonfungible tokens, green bond tokenization, and a digital Hong Kong dollar.

Christopher Hui, Hong Kong’s secretary for financial services and the reasury, said:

“We recognise the potential of DLT and Web 3.0 to become the future of finance and commerce, and under proper regulation they are expected to enhance efficiency and transparency. The Government is prepared to embrace this future, and we welcome the clustering of Fintech and VA community and talents in Hong Kong, and we will promote the sustainable development of financial services across the whole VA value chain.”

Hong Kong’s policy aims would seemingly put it on a different path than China, despite the political lines between the special administrative region and bordering nation becoming more blurred in recent years. The Chinese government has cracked down on crypto firms operating in the country but continues to move forward with piloting its central bank digital currency, the digital yuan.