SFC issued a circular yesterday titled “Regarding the Approval of Fund Investment in Virtual Assets by the Securities and Futures Commission”. The circular specifically emphasizes the importance of asset segregation and private key management, requiring trustees and custodians to separate their own assets from those held for other clients, and store private keys securely in Hong Kong.
Summary:
Is Hong Kong surpassing the United States? What are the regulatory requirements for the approval of cryptocurrency “spot ETF” by the Securities and Futures Commission?
Background:
Hong Kong Securities and Futures Commission gives green light: Considering approving “Bitcoin spot ETF” for retail investors, if regulatory requirements are met.
Table of Contents:
Separation and custody of customer and platform assets
Private keys must be securely stored in Hong Kong
Regulatory requirements for cryptocurrency spot ETFs by SFC
Hong Kong Securities and Futures Commission (SFC) CEO, Ashley Alder, stated on November 6th that Hong Kong is actively considering opening up cryptocurrency spot ETFs to retail investors, provided they meet regulatory standards.
Yesterday (22nd), SFC and the Hong Kong Monetary Authority issued a joint circular on “Intermediaries’ Activities involving Virtual Assets”. The circular indicates that in addition to existing cryptocurrency futures ETFs, Hong Kong plans to accept authorization applications for “other funds related to virtual assets,” including cryptocurrency spot ETFs.
Meanwhile, in its circular titled “Regarding the Approval of Fund Investment in Virtual Assets”, SFC has provided clear regulations on the security management measures for trustees/custodians and their responsible individuals 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 those held for other clients to mitigate the risk 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 critical information should be securely stored in Hong Kong and access to them 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 sharding should be implemented. In addition, appropriate backup measures are also critical to ensure that access and recovery of assets are not affected even in extreme circumstances.
These regulations reflect SFC’s rigorous approach to the management of virtual assets and indicate its serious consideration of accepting cryptocurrency spot ETFs, raising expectations of whether Hong Kong will be the first to approve such ETFs ahead of the United States.
Regarding SFC’s regulatory approach to cryptocurrency spot ETFs, the following requirements are listed:
– 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 subscriptions and redemptions in the form of physical assets and cash.
– In terms of custody, the custody service provider of the fund can only entrust its custodial services 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 trading volume of virtual assets on major trading platforms.
– Funds planning to hold more than 10% of their net assets in cryptocurrencies should seek prior consultation on management opinions from SFC.
Regarding SFC and the Hong Kong Monetary Authority’s open attitude towards cryptocurrency spot ETFs, Jason Chan, partner at Howse Williams law firm in Hong Kong, stated:
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Tags:
ETF
SFC
Ashley Alder
Spot ETF
Hong Kong