Detailed explanation of the Hong Kong version of Bitcoin spot ETF regulation: everything is ready, all we need is the east wind

Source: Xiao Sa lawyer

Recently, friends in the crypto asset circle have been discussing the issue of the US Prime Minister with high emotions. According to the official website of the U.S. Securities and Exchange Commission (hereinafter referred to as "SEC"), the ARK 21Shares Bitcoin ETF (ARKB) Bitcoin Spot Fund applied by 21Shares/ARKInvest (hereinafter referred to as "ARK21") has received final review. The period is about to expire (January 10, 2024), and the SEC will soon make a ruling on Ark21’s ETF application. At this sensitive time point, due to the delay in official news coming out, the SEC's official social media platform was hacked and false news was released: "Approval of all applications for Bitcoin spot ETFs to be listed on U.S. national exchanges." But then , SEC Chairman Gary Gensler urgently "refuted rumors" in his personal account, saying that the SEC account had been stolen and that the SEC had not yet approved the listing and trading of spot Bitcoin ETFs.

This oolong caused a double shock in the capital market and the encryption market, because the market generally believed that the SEC was very likely to pass the ARK21 application, and a large number of Bitcoins would be passed in the future. The application for spot ETFs and the SEC’s “refutation of rumors” have indeed affected market confidence. Today, Sister Sa’s team will explain in detail the relevant situation of Bitcoin spot ETF and analyze the relevant regulatory rules of Bitcoin spot in Hong Kong.

01 What is a Bitcoin Spot ETF?

Before explaining to you what a Bitcoin spot ETF is, you first need to understand what an ETF is?

ETF, the full name of "traded open-end index fund", may also be called Exchange Traded Funds (Exchange Traded Funds). It is an open fund listed and traded on an exchange with variable fund shares. A fund is a basket of stocks that tracks a certain industry or an index. The so-called "trading type" means that ETF funds can be bought and sold like stocks, which is commonly known as "on-market purchase"; "open type" means that investors can purchase or redeem fund shares from the fund management company, which is also commonly known as "open-end". "Off-site redemption".

It may not be easy to understand just by talking about the concept. Let’s use technology ETF as an example to explain the practical operation of ETF and its advantages for investors.

Since 2021, AI technology, wireless high-speed Internet, etc. have ushered in great development. The stock prices of many individual stocks in the entire technology sector have risen rapidly, and the market is very optimistic about the technology sector. However, due to the large number of technology stocks and the high threshold of professional knowledge required for investment, ordinary investors may have difficulties in choosing reliable stocks. If there are many promising stocks, buying them all will make the investment too large. Once the market Fluctuations, your own wealth will be greatly affected. At this time, ETFs have become the best choice for investors.

As mentioned before, ETF is a combination of a basket of stocks and can track a certain industry or a certain index. The purchase price is not high and most investors can afford it. Therefore, ETF, as an efficient index investment tool that combines stocks, open-end index funds and closed-end index funds, is widely popular in the capital market.

Bitcoin spot ETF is actually a "basket" of assets that hold stocks, bonds, commodities, and soon, Bitcoin. As early as 2013, a Bitcoin trust fund applied for a Bitcoin spot ETF to the U.S. SEC. However, in recent years, the SEC has not approved the relevant application for Bitcoin spot due to its cautious regulatory attitude and has not targeted this special financial product. No regulatory documents were issued until August 2023, when a U.S. court ruled that the SEC’s rejection of such applications was “unfair” and the SEC began to re-examine Bitcoin spot ETFs.

As far as Hong Kong is concerned, the development of Bitcoin spot ETFs is slightly later than that of the United States, but the Hong Kong Securities and Futures Commission (hereinafter referred to as "SFC") is faster based on its latecomer advantages and its own regulatory characteristics. The country has promulgated relevant regulatory rules to guide applicants in the right direction.

02 What are the key points of Hong Kong Bitcoin spot ETF regulation?

In 2022, after my country’s Hong Kong region initially established a licensing supervision system for crypto assets, we have clearly seen Hong Kong’s determination to embrace crypto assets. On December 22, 2023, the Hong Kong Securities and Futures Commission issued the "Joint Circular on Virtual Asset-Related Activities of Intermediaries" and the "Circular on SFC-Authorized Funds' Investment in Virtual Assets", announcing that it was "ready to accept virtual assets." "Application for recognition of asset spot ETFs and other funds", and intends to make Hong Kong the first region in Asia to accept the listing of crypto asset spot ETFs such as Bitcoin and Ethereum.

In general, Hong Kong requires the issuance of Bitcoin spot ETFs to first meet the Hong Kong Securities Regulatory Commission’s regulatory requirements for traditional ETF issuance. The former document mainly involves traditional regulatory requirements, that is, it first needs to In line with the regulation of ETFs under the Hong Kong Code of Unit Trusts and Mutual Funds, and combined with the custom of issuing ETFs in Hong Kong, the Sajie team believes that if Bitcoin spot ETFs are issued in Hong Kong, unit trusts may still be the main ones. Carrier. Below, we will give you a detailed introduction to the regulatory focus on the issuance of Bitcoin spot ETFs in Hong Kong based on the requirements of the two circulars.

(1) Issuer qualification requirements

Hong Kong SFC has strict requirements for issuer qualifications:

1. Have a good compliance reputation. In other words, it is more difficult for newly established entities and entities with regulatory “black histories” to pass review.

2. Have at least one employee with experience in crypto asset product management. The Sajie team reminds that the employee’s qualifications can refer to the RO (licensed person in charge) of the Hong Kong crypto asset license application

3. The subject already holds the No. 9 license, and the No. 9 license contains compliance with the "Applicable Standard Terms and Conditions for Licensed Corporations Managing Portfolios Investing in Virtual Assets.

(2) Categories of virtual assets that can be included in ETFs

The Sajie team believes that according to the current regulatory rules for crypto assets in Hong Kong, such The categories of virtual assets that an ETF can include will not exceed the two categories of crypto assets that can be listed on licensed exchanges: BTC and ETH.

(3) Under anti-money laundering requirements, redemption and transaction models with Hong Kong characteristics

The two circulars clearly stated that they are issued in Hong Kong, my country Virtual asset spot ETFs can be traded in two modes: cash (Cash Model) or physical (In-Kind Modder). However, if it is a physical redemption of crypto assets, the crypto assets must first be transferred to a licensed exchange in Hong Kong or other regulated financial institutions. This is mainly to prevent criminals from using BTC and redemption through physical redemption. Mutual conversion and cleaning of ETH. In addition, Sajie's team specifically reminds that traders who apply for redemptions must hold a No. 1 license that complies with the "Standard Terms and Conditions for Licensed Corporations that Manage Investment Portfolios Investing in Virtual Assets."

(4) Crypto-asset custody requirements

In order to ensure the stability of the crypto-asset market, the Hong Kong Securities and Futures Commission requires that relevant crypto-assets must be independently managed by third-party institutions , and the custodian institution must be another compliance institution of a licensed exchange in Hong Kong, and it must also meet three conditions:

1. The custody account is isolated from the account of the asset management company;

2 . Most of the virtual assets are stored in offline wallets (cold wallets), and a small amount are stored in online wallets (hot wallets) for redemption;

3. The private key must be kept in Hong Kong and measures must be taken. Protect against cyber hackers and have proper backups.

(5) Investor Restrictions

A question that most partners are more concerned about is: Can residents of mainland China buy and sell in Hong Kong? Cryptocurrency ETFs? A simple answer: no. The "Joint Circular on Virtual Asset-Related Activities of Intermediaries" has clearly stipulated: "The sales of virtual asset-related products must comply with the requirements of the relevant jurisdictions." Sajie's team believes that crypto-asset ETFs, especially those based on ETFs with BTC and ETH as the underlying assets fall into the category prohibited from carrying out related transactions in my country’s 9.24 Notice. my country's "Notice on Further Preventing and Dealing with Speculation Risks in Virtual Asset Transactions" clearly stipulates that virtual currency-related business activities are illegal financial activities. Therefore, crypto-asset ETFs issued in Hong Kong will be prohibited from being sold to mainland Chinese investors. It is very likely that mainland residents will not be able to purchase related products when they physically come to Hong Kong.

03 Written at the end

Although the US Securities Regulatory Commission made a big mistake late at night, and subsequently obtained Judging from the performance of the meeting, the emergence of U.S. Bitcoin spot ETF is likely to be far away. However, compared to the United States, the Sajie team believes that Hong Kong has made full use of its late-mover advantage, absorbed the regulatory norms for crypto assets from jurisdictions such as the United States, and applied them flexibly taking into account the current regulatory status of Hong Kong itself. Therefore, Hong Kong is gradually growing into a crypto-friendly jurisdiction. The Sajie team believes that instead of trying to break through the "one-plank bridge" of the US SEC, issuers should walk on two legs and try the Hong Kong market, which may bring unexpected surprises.