Hong Kong SFC to Proceed with Retail Crypto ETF Authorization Plan | Asset Owners | Asian investor

Hong Kong’s financial regulator is pushing ahead with its plan to open up the cryptocurrency futures fund market to retail investors.

A spokesperson for the Securities and Futures Commission (SFC) said Asian investor the regulator is happy with its recently introduced rules for the approval of crypto funds and believes that they are sufficient to protect investors from substantial losses, despite the bloodshed seen following the recent FTX scandal.

Cryptocurrency exchange FTX, valued at $32 billion earlier this year, has entered bankruptcy proceedings as its founder and former CEO, Sam Bankman-Fried, remains embroiled in an embezzlement scandal. The stock market crash has far-reaching effects for investors, including Singapore’s Temasek, who called off his $275 million investment in FTX.

There is no doubt that cryptocurrencies are still a speculative asset. Investors in Grayscale Bitcoin Trust, the world’s largest cryptocurrency fund, have seen its net asset value drop 83% since bitcoin peaked in November 2021.

Contagion is the biggest unknown risk for investors in this market. Grayscale also suffered the ripple effects of the failure of Three Arrows Capital, a Singapore-registered crypto hedge fund that filed for bankruptcy in July.

Stewart Aldcroft, Hong Kong-based fund industry veteran and former senior adviser at Citigroup, said Asian investor it was fair to ask whether retail investors should be able to buy crypto products such as ETFs.

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“I suspect that any regulatory approvals, such as the SFC’s, would require retail products to come with detailed health warnings and possibly higher minimum subscription levels. But again, investors will always find a way when ‘they’ll want to buy something, and crypto has that effect on many,’ Aldcroft said.

One risk is that investors may mistakenly believe that by investing indirectly, through crypto futures, they would be protected from extreme market fluctuations. Data from the United States showed that investors invested $379 million net in crypto funds in 2022, despite the numerous scandals plaguing companies in the sector.

Aldcroft believes young investors are most at risk because they can “experiment more readily with where they put their money, and based on the theory that many more traditional areas of investing haven’t done so well these last years”.

The G20 Financial Stability Board said that “recent turmoil in crypto-asset markets highlights their inherent volatility, structural vulnerabilities and growing interconnectedness with the mainstream financial system.

“An effective regulatory framework must ensure that crypto-asset activities with similar risks to traditional financial activities are subject to the same regulatory outcomes, while taking into account the new characteristics of crypto-assets and exploiting their advantages.”

The SFC’s current stance on crypto fund regulation was outlined by Deputy Managing Director Julia Leung during Hong Kong Fintech Week in October. In her remarks, she said, “the excesses of some crypto companies not only threaten their own well-being, but also that of investors and the entire crypto ecosystem.”

EXPONENTIAL INCREASE

When the SFC first introduced its regulatory framework for virtual assets (VA) in 2018, the crypto market was still relatively new and access was limited to professional investors.

“Four years have passed now,” said Leung, “and while crypto assets remain volatile, their global market capitalization has grown exponentially. From our own product survey, we note that investors purchased HK$10 billion of VA funds through overseas platforms in 2021, up from HK$8 million a year earlier. Investors now have a better understanding of the risks involved in trading these assets. »

Reflecting this perceived sophistication among investors, the SFC had actively sought to put in place a regime to license ETFs that could provide exposure to traditional virtual assets along with the appropriate safeguards for investors. Leung revealed that virtual asset futures ETFs would be subject to additional requirements related to its management company, investment strategy, disclosure and investor education

A fund management company offering a VA futures ETF, for example, should adopt an active investment strategy to allow flexibility in portfolio composition, including a wide range of futures positions with multiple expiration dates. The net derivatives exposure of such an ETF must not exceed 100% of the total net asset value of the ETF, according to the regulator.

Commodity information should contain advance information on the main risks associated with VA futures contracts, such as margin risk and the risk associated with mandatory measures imposed by relevant parties. Initially, the SFC expects the underlying assets to be limited to Bitcoin and Ether futures contracts traded on the Chicago Mercantile Exchange.

An earlier SFC circular acknowledges that “much of the VA ecosystem (e.g. VA trading platforms) is still not subject to the same robust regulation as service providers or products in traditional financial markets “, and therefore “investment products that invest directly in spot AVs may continue to pose investor protection concerns.

Following the turmoil in the crypto market this month, the Hong Kong regulator does not appear to have ruled out increased regulation. “The SFC may consider introducing additional requirements or conditions deemed necessary or appropriate in the performance of its duties,” a spokesperson said. Asian investor.

The spokesperson was unable to comment on the crypto ETF clearance requests received so far.