The new Hong Kong laws protect investors by limiting the selling of spot ETF products to professional investors.
Hong Kong’s financial regulators have issued new guidelines for intermediaries who want to sell clients virtual asset-linked products like exchange-traded funds (ETFs). The new rules target products such as spot ETFs, which track the current price of assets like bitcoin and allow for instantaneous buying and selling.
Hong Kong’s stand on Spot ETFs
The Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) determined that 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,” according to a circular published Friday.
According to the circular, the HKMA and SFC issued the new guidance in response to “an increasing number of requests” from service providers interested in supplying virtual asset-backed solutions to their customers.
Virtual asset-linked products have grown in popularity, especially since the first bitcoin futures ETF was approved by US regulators in October, and the fund’s first day of trading saw nearly $1 billion in volume. However, a spot bitcoin ETF has yet to be approved in the United States. The Securities and Exchange Commission (SEC) of the United States rejected a request for a spot ETF on Thursday, just days after rejecting another plan.
Other countries, such as Canada, Germany, Switzerland, and Brazil, have indicated a preference for spot ETFs in the meantime.
According to the circular, Hong Kong’s new guidelines are aimed to protect investors and include a restriction on the selling of spot goods to professional investors. Another requirement is that service providers put their clients through a virtual asset knowledge test.
For derivatives-based products, the requirements are less stringent. The “professional investors only” restriction does not apply to futures-based exchange-traded products related to virtual assets, despite the fact that they will still be deemed complicated financial instruments, according to the circular.
“Trading is governed by conventional regulations in the event of virtual asset futures contracts traded on a defined exchange that is a regulated futures market.” The circular stated that “pricing transparency and potential market manipulation may be less of a problem,” and that the same applies to futures ETFs.
Professional investors should only invest in non-derivative ETF products offered by foreign exchanges, according to the new guidance. Hong Kong regulators believe the dangers of these “complex” exchange-traded instruments are “not reasonably expected to be grasped by a typical investor,” according to the circular.
“The SFC and the HKMA think it acceptable and necessary to require intermediaries to partner solely with SFC-licensed [virtual asset] trading platforms to guarantee adequate investor protection,” the circular stated.
The SFC and the HKMA have given virtual asset service providers a six-month grace time to adjust their systems and controls in order to comply with the new requirements.
“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,” according to the circular.
