A voluteer holding a sign talks to a visitor at FinTech Week 2022 in Hong Kong in October.
FinTech Week in Hong Kong. Julia Leung, deputy chief executive of the SFC, said the regulator was looking at crypto futures ETFs in the first instance © AFP/Getty Images

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Hong Kong’s Securities and Futures Commission looks set to allow the launch of exchange traded funds tracking cryptocurrency futures for retail investors, citing the increasing sophistication of investor safeguards.

Julia Leung, deputy chief executive and executive director of intermediaries at the SFC, said the regulator was “actively looking to set up a regime to authorise ETFs that provide mainstream virtual assets with appropriate investor guardrails”.

In the initial stages, the SFC will only allow ETFs investing in bitcoin futures and ether futures traded on the Chicago Mercantile Exchange, Leung said during her keynote address at Hong Kong FinTech Week last week.

The latest communication follows a joint circular from the SFC and the Hong Kong Monetary Authority in January this year that said a “limited suite” of products linked to virtual assets could be permitted for Hong Kong retail investors.

This article was previously published by Ignites Asia, a title owned by the FT Group.

Leung characterised the existing professional investor requirement for crypto assets investments as the “elephant in the room”, noting that when the SFC introduced this requirement as part of its virtual assets framework four years ago, the territory’s crypto assets industry was still relatively new.

The SFC first issued rules on virtual assets in November 2018 restricting access to virtual-assets-based funds to professional investors due to the heightened risks associated with the asset class, as well as the lack of regulation around certain platforms or managers in the space.

“Given the novelty of our framework and the high volatility of crypto assets, we believed it was prudent to impose an overarching ‘professional investor’ restriction,” she said.

Hong Kong’s crypto asset ecosystem had made “substantial advancement” in the past four years, however, with more global financial institutions and service providers entering this space and providing institutional-grade infrastructure. During this time, the regulator had gained more experience in regulating virtual asset trading platforms and fund firms, she argued.

“We have come to believe that some initial concerns about virtual asset futures ETFs have become manageable and can be addressed with proper safeguards,” said Leung.

“It is now an opportune time to review the ‘professional investor only’ requirement,” she added.

Richard Douglas, Hong Kong chief executive at Saxo Markets, said the opening-up of crypto-based ETFs to local retail investors would help Hong Kong “restore its credentials as a finance hub and attract more talent to the city after a difficult few years”.

The demand from retail clients for crypto products was there, and Saxo was assessing which of its existing products could “be a good fit” for retail investors, Douglas said in a company statement.

Gary Tiu, executive director of digital assets investment firm BC Technology Group and head of regulatory affairs, added that a relaxation of rules to allow retail access would “encourage tier-one financial institutions to accelerate entry into digital assets in Hong Kong”.

Leung’s speech comes as rival Asian finance and digital assets hub Singapore is taking steps to crack down on cryptocurrency providers after initially establishing a relatively relaxed regulatory framework.

The Monetary Authority of Singapore has repeatedly warned about retail investments in cryptocurrencies and worked to restrict retail access to the asset class.

In January, it released new guidelines prohibiting digital payment token service providers from nearly all forms of public advertising outside of their own websites, mobile apps and social media accounts.

In contrast, Australian regulators have led the way in the region when it comes to retail crypto ETFs, with the first bitcoin and ether-based products launching in May.

Fidelity became the first large global asset manager to offer an exchange-traded product physically backed by bitcoin in Hong Kong last week, though the product is only available to professional investors.

“The crypto community has long believed that regulation inhibits innovation, limiting fintech development and thus investor choice,” the SFC’s Leung said in her keynote address.

But, she added that this argument had been challenged by recent events in the cryptocurrency space, including the collapse of Luna and Terra in May, and the subsequent bankruptcy of Three Arrows Capital.

“The excesses of certain crypto firms threaten not just their own wellbeing, but also that of investors and the entire crypto ecosystem,” she argued, noting that total market capitalisation of crypto assets had shrunk from $3tn a year ago to $1tn currently.

“The crypto winter has strengthened the resolve of global financial regulators to regulate crypto asset service providers,” she added.

Leung also announced that the regulator was preparing to “adjust our regulatory response and allow retail access” to security token offerings, provided certain safeguards were in place.

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