The Securities and Futures Commission (SFC) released a circular yesterday titled “Circular on the Recognition of Funds Investing in Virtual Assets by the SFC.” The circular 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.
Background:
Hong Kong to become Asia’s first? What are the regulatory requirements for the SFC to approve “Cryptocurrency Spot ETF”?
In a press conference on November 6, Ashley Alder, the CEO of the SFC, stated that Hong Kong is actively considering opening up cryptocurrency spot ETFs to retail investors, provided that they meet regulatory standards.
Yesterday, the SFC and the Hong Kong Monetary Authority jointly issued a “Circular on Activities Related to Virtual Assets by Intermediaries.” The circular states that in addition to the current cryptocurrency futures ETFs, Hong Kong plans to accept authorization applications for “other funds related to virtual assets,” including cryptocurrency spot ETFs.
At the same time, the SFC has set out clear regulations for the trustees/custodians and their responsible officers of cryptocurrency spot funds in its circular on the “Recognition of Funds Investing in Virtual Assets by the SFC.” 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 reduce 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 highly secure cold wallets, and the amount and duration of holding virtual assets in hot wallets should be minimized, and only used 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 strict access restrictions should be imposed on authorized personnel.
To prevent potential speculation or collusion, private keys should be generated in an uncertain manner (e.g. using a random number generator) and measures such as multi-signature and key sharding should be implemented. In addition, appropriate backup measures are also crucial to ensure that access to and recovery of assets are not affected even in extreme circumstances.
These regulations reflect the SFC’s rigorous approach to virtual asset management and indicate its serious consideration of accepting cryptocurrency spot ETFs, raising market expectations as to whether Hong Kong will be the first to approve cryptocurrency spot ETFs ahead of the United States.
Regarding the SFC’s regulatory requirements for cryptocurrency spot ETFs, the following points are listed:
– Virtual asset transactions related to spot ETFs should be conducted through SFC-licensed Virtual Asset Trading Platforms (VATPs) or authorized financial institutions.
– Such ETFs allow subscriptions and redemptions in both cash and physical form.
– In terms of custody, the fund’s custodial service provider can only entrust custody to SFC-licensed Virtual Asset Trading Platforms or financial institutions that meet the Hong Kong Monetary Authority’s standards for cryptocurrency custody.
– For valuation of virtual assets, fund management companies should adopt index-based methods that calculate the trading volume of virtual assets as used by major trading platforms.
– Funds planning to hold cryptocurrencies exceeding 10% of their net assets should seek prior consultation with the SFC for management advice.
Regarding the SFC and the Hong Kong Monetary Authority’s open attitude towards cryptocurrency spot ETFs, Jason Chan, a partner at Howse Williams law firm in Hong Kong, stated:
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Tags:
ETF
SFC
Ashley Alder
Spot ETF
Hong Kong