After the Securities and Futures Commission (SFC) issued the Circular on SFC-authorised Funds with Exposure to Virtual Assets1 on 22 December 2023 (VA Circular), stating that it would "consider authorising investment funds with exposure to virtual assets (VA) of more than 10% of their net asset value (NAV) for public offerings in Hong Kong" (VA Funds) (including but not limited to VA-related exchange-traded funds (VA ETFs)), six SFC-authorised spot VA ETFs were listed on the Hong Kong Stock Exchange (HKEx) for trading on 30 April 2024, being the first batch of spot VA ETFs that are available for trading across the exchanges in Asia.
In December 2017, Bitcoin soared to its then all-time high of US$19,650. However, within just a year, its value plummeted by nearly 80%, trading at less than US$4,000. Noting the risks associated with VAs, but at the same time recognising investors' interest, the SFC was on a mission to formulate a balanced regulatory approach.
On 31 October 2022, the SFC issued the Circular on Virtual Asset Futures Exchange-Traded Funds (VA Futures ETFs), setting out the requirements for VA Futures ETFs seeking SFC authorisation for public offering in Hong Kong. On 1 June 2023, the new licensing regime for Virtual Asset Trading Platforms (VATPs) took effect. The object of the new licensing regime is to fill in the regulatory lacuna in the regulation of crypto trading. With the introduction of the new VATPs licensing regime, VATPs engaging in the trading of non-security tokens are regulated under the VATP regime, while those in the trading of security tokens remain regulated under the SFO.2
The latest development in this regard was the listing of Asia's first six spot VA ETFs on the HKEx on 30 April 2024. Unlike VA Futures ETFs which "roll" bitcoin and ether futures contracts traded on recognised exchanges, spot VA ETFs provide investors more direct exposure to VAs.
Note: Each of the first six spot VA ETFs was established in corporate form as a sub-fund under the umbrella of an open-ended fund company in Hong Kong with variable capital, limited liability and segregated liability between sub-funds.
In addition to the requirements in: (i) the Overarching Principles Section and the Code on Unit Trusts and Mutual Funds (UT Code) in the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products; and (ii) the joint circular on intermediaries' virtual asset-related activities3, an applicant must also satisfy the requirements set out in the VA Circular.
The VA Circular sets out the requirements which the SFC will consider when authorising VA Funds, principally from an investor protection perspective on the competence, availability and readiness of the service providers to deliver quality VA-related investment, custodian, administrative and other services. See the following table for a summary:
Overall, Hong Kong's updated regulatory approach on virtual assets is welcomed as it supports product innovation. Under the VA Circular, SFC-authorised VA Funds are required to disclose in the offering documents the investment limits and key risks associated with the funds' VA exposures, while management companies of SFC-authorised VA Funds are also expected to conduct investor education before the launch in accordance with the UT Code requirements.
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Acknowledgements to corporate trainee Jacky Cheung for research and contribution to this article.
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