Hong Kong Regulators Impose Limits on Investing in Spot Crypto ETFs

Hong Kong financial regulators have published new guidance for intermediaries looking to offer virtual asset-linked products like exchange-traded funds (ETF) to investors. The new rules single out products like spot ETFs that track the current price of assets such as bitcoin and allow immediate buying or selling.

According to a circular published Friday, the Hong Kong Monetary Authority (HKMA) and Securities and Futures Commission (SFC) determined spot markets for virtual assets are “largely unregulated at present, [so] they are more likely to present investor protection issues, ranging from a lack of pricing transparency to potential market manipulation.”

The HKMA and SFC are issuing the new guidance after receiving “an increasing number of enquiries” from service providers that were interested in offering virtual asset-backed products to their customers, the circular said.

Virtual asset-linked products have become increasingly popular, particularly after U.S. regulators approved the first bitcoin futures ETF in October and that fund hit close to $1 billion in volume on its first day of trading. But the U.S. has yet to approve a spot bitcoin ETF. On Thursday, the U.S. Securities and Exchange Commission (SEC) rejected a proposal for a spot ETF days after rejecting another proposal.

In the meantime, other countries, including Canada, Germany, Switzerland and Brazil, have all shown a preference for spot ETFs.

Hong Kong’s new rules are designed to protect investors and include limiting the sale of spot products to professional investors, the circular said. Another requirement requires service providers to test their clients on their knowledge of virtual assets.

The rules aren’t so strict for derivatives-based products. Even though they will still be considered complex financial instruments, the “professional investors only” restriction doesn't apply to futures-based exchange-traded products related to virtual assets, the circular said.

“In the case of virtual asset futures contracts traded on a specified exchange which is a regulated futures market, trading is governed by conventional rules. Pricing transparency and potential market manipulation may be less of a concern,” the circular said, adding that the same applies to futures ETFs.

The new guidance also highlights that exposure to non-derivative ETF products offered overseas should be limited to professional investors. According to the circular, Hong Kong regulators feel the risks of these “complex” exchange traded products are “not reasonably likely to be understood by a retail investor.”

“To provide adequate investor protection, the SFC and the HKMA consider it appropriate and necessary to require intermediaries to partner only with SFC-licensed [virtual asset] trading platforms,” the circular said.

The SFC and the HKMA is giving a six-month transition period for virtual asset service providers to revise their systems and controls to meet the new guidelines.

“Intermediaries which do not currently engage in [virtual asset]-related activities should ensure that they are able to comply with the requirements in this circular before introducing such services,” the circular said.