The Hong Kong Securities and Futures Commission (SFC) is open to granting approval for exchange-traded funds (ETFs) that directly invest in cryptocurrency, provided that new regulations are in place to address emerging risks. As of now, the SFC has given the green light to two Bitcoin futures ETFs and one Ethereum futures fund.
The Chief Executive of the SFC, Julia Leung, stated that the regulator is willing to consider proposals that enhance efficiency and improve the customer experience. Earlier this year, many investors saw BlackRock’s application to launch a Bitcoin exchange-traded fund as a signal that the market was ready for a spot ETF.
Leung emphasized the necessity for a “comprehensive regulatory framework” following the alleged fraud incident at the Hong Kong Exchange JPEX, where $178 million in customer funds were allegedly misappropriated. She expressed the willingness to explore crypto ETFs as long as measures are taken to address potential risks, maintaining a consistent approach across different asset classes.
Leung’s remarks come as the SFC refines its cryptocurrency regulations, having introduced its initial set of rules in June. Furthermore, the SFC is actively working on new regulations governing stablecoins and the tokenization of real-world assets.
The Hong Kong Monetary Authority (HKMA) is also in the process of developing guidelines to assist banks in holding tokenized assets, which may facilitate the establishment of rules for safeguarding crypto assets held in ETFs.
In the United States, the Securities and Exchange Commission (SEC) has delayed the approval of Bitcoin ETFs due to concerns about possible market manipulation and the protection of customer assets in the event of Bitcoin price fluctuations.
Several companies, including BlackRock, Bitwise Asset Management, Fidelity Investments, and Franklin Templeton, have submitted applications to launch Bitcoin ETFs. Grayscale Investments is pursuing the conversion of its closed-ended Bitcoin trust into a spot ETF.
To mitigate potential risks, some investment managers have amended their applications to include market surveillance agreements with exchanges. The approval of a crypto ETF may also necessitate clearer laws governing the safekeeping of customer assets, as a 2023 proposal by the SEC requires a qualified third-party custodian to hold assets on behalf of customers, but a clear qualification process and a list of qualified companies have not been provided.
For example, Coinbase Custody currently safeguards digital assets on behalf of BlackRock, utilizing multiparty computation to enhance security, but there is no explicit legal standardization of this arrangement.