Hong Kong Government Reconsiders Stance on Virtual Asset ETFs, Tokenized Securities, Retail Investors

HONG KONG — Hong Kong’s Financial Services and Treasury Bureau issued a policy statement on virtual assets at the opening of the city's flagship tech conference Hong Kong FinTech Week on Monday.

Hong Kong is “ready to engage” with global virtual asset service providers and invite them to the city, the statement says. The jurisdiction's Legislative Council is currently reviewing Hong Kong's new VASP licensing regime as part of proposed amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. The regime is set to come into effect March 1 next year.

Hong Kong's Securities and Futures Commission (SFC) will conduct a public consultation on how retail investors may be given a “suitable degree of access to virtual assets" to licensed exchanges, according to the policy statement.

Currently, retail customers can trade crypto on unlicensed exchanges such as Binance. After the VASP regime takes effect, only VASP licensed exchanges can offer any crypto services, and some might be able to offer crypto services to retail customers.

The policy statement adds that Hong Kong is “open to the possibility” of having exchange-traded funds on virtual assets, pledging to enhance investor protection and ensure suitable regulatory arrangements are in place.

“The SFC has been actively looking to set up a regime to authorize ETFs [that] provide exposure to mainstream virtual assets with appropriate investment guardrails,” Securities and Futures Commission Deputy Chief Executive Officer Julia Leung said at Hong Kong FinTech Week.

Leung added that virtual assets futures ETFs will be subject to additional requirements related to management company, investment strategy, disclosure and investor education. In the initial stage, the underlying assets will be confined to bitcoin futures and ether futures traded on the Chicago Mercantile Exchange, Leung said.

In her speech, Leung also announced changes to how the SFC views tokenized securities. The SFC takes the view that tokenized securities should be treated in a similar way to existing financial instruments, she said. The SFC will no longer classify tokenized securities as complex products just because they are issued on the blockchain, Leung said.

If proper safeguards are put in place, the SFC is prepared to allow retail access, Leung said. The SFC is working on a circular to set out changes to the security token regime in detail.

Given differences between traditional assets and virtual assets, the government is open to future review on property rights for tokenized assets and the legality of smart contracts, the statement says.

“We were sometimes a bit hesitant or even resistant wondering how new creatures like crypto, stablecoins, [decentralized finance] or other blockchain-based innovations can fit into mainstream finance,” Hong Kong Monetary Authority CEO Eddie Yue said at Hong Kong FinTech Week.

Yue said that it had become apparent that the technologies underpinning them will “develop very nicely in a healthy financial system like Hong Kong.”

Hong Kong is exploring pilot projects on non-fungible token issuance for Hong Kong FinTech Week, green bond tokenisation and eHKD, the policy statement says.

Its virtual asset ecosystem could realize use cases including trading arts and collectibles, tokenizing vintage goods and tokenizing debt securities, the statement says.