Lately there has been a lot of buzz, within the asset community regarding the news of the U.S. Bitcoin BTC -2.24% spot ETF. As per the website of the U.S. Securities and Exchange Commission (SEC) the ARK 21Shares Bitcoin ETF (ARKB) spot fund, filed by 21Shares/ARKInvest (referred to as “ARK21”) is approaching its review deadline which is set for January 10 2024.
The SEC is currently in the process of making a decision on Ark21s ETF application. In this time there was an incident where the SECs official social media platform got hacked and false information was posted claiming that all applications for Bitcoin spot ETFs to be listed on national exchanges in the U.S. Have been approved. However SEC Chairman Gary Gensler promptly clarified on his account that their official account was misused and that they haven’t yet approved any listing or trading of spot Bitcoin ETFs.
This mistake had an impact on both capital markets and crypto markets since there was a belief that the SEC would likely approve ARK21s application followed by a large batch of Bitcoin spot ETF applications. The clarification, from the SEC indeed affected market confidence.
In 2022 Hong Kong demonstrated its commitment, to embracing assets by establishing a system for licensing. On December 22 2023 the Hong Kong Securities and Futures Commission released two documents; the “Joint Circular on Activities Related to Assets by Intermediaries” and the “Circular on Recognition of Funds Investing in Virtual Assets by the SFC”. These announcements signify that Hong Kong is now open to accepting applications for virtual asset spot ETFs and aims to become the region in Asia to list spot ETFs for cryptocurrencies such as Bitcoin and Ethereum ETH -1.06%.
To issue Bitcoin spot ETFs in Hong Kong issuers must initially fulfill the requirements set forth by the Hong Kong Securities and Futures Commission for ETFs. The aforementioned documents primarily focus on requirements, specifically compliance with the “Code on Unit Trusts and Mutual Funds ” which governs ETF regulation in Hong Kong.
Following Hong Kongs practice of issuing ETFs it is expected that Bitcoin spot ETFs in this region will predominantly utilize Unit Trusts as their vehicle. In this article we will delve into the aspects of issuing Bitcoin spot ETFs, in Hong Kong while considering both circulars requirements.
Qualification Requirements
The Hong Kong Securities and Futures Commission (SFC) has criteria when it comes to the qualifications of issuers:
- Good compliance reputation is a must. This means that established entities or those with a regulatory history will face greater challenges in passing the review.
- At one employee should possess experience in managing asset products. The qualification of this employee can be aligned with the Responsible Officer (RO) for asset license applications in Hong Kong.
- The entity must already hold a Type 9 license, which includes fulfilling the requirements stated in the “Standard Terms and Conditions Applicable to Corporations Licensed for Managing Portfolios Investing in Virtual Assets”.
Categories of Virtual Assets Covered by ETFs
Based on guidelines for crypto assets in Hong Kong these ETFs can include virtual asset categories limited to BTC and ETH which are cryptocurrencies traded on licensed exchanges.
Unique Redemption and Trading Model under Anti Money Laundering Requirements
These two circulars specify that virtual asset spot ETFs issued in Hong Kong can adopt either a cash based trading mode (Cash Model) or an, in kind trading mode (In Kind Model) both complying with money laundering regulations.
However if there is a need to redeem assets through monetary means they must first be transferred to a licensed exchange, in Hong Kong or other regulated financial institutions. This requirement primarily aims to prevent criminals from exploiting monetary redemption as a means to convert and launder BTC and ETH.
Regarding the custody of assets the Hong Kong Securities and Futures Commission mandates that these assets must be held by third party institutions. These custodians should. Be an exchange in Hong Kong or another compliant institution and they need to fulfill three conditions:
- The custodial account must be separate from the asset management companys account.
- Most of the assets should be stored in wallets (cold wallets) with only a small portion kept in online wallets (hot wallets) for redemption purposes.
- The private keys must be securely stored within the Hong Kong region employing measures to safeguard against cyber attacks while having arrangements in place.
These requirements aim to ensure stability within the asset market while maintaining security measures, for handling digital assets.