Hong Kong’s Securities and Futures Commission is set to conduct a public consultation on how to give retail investors access to digital assets.
Though crypto exchanges are allowed to operate in the territory under current rules, access is limited to investors with portfolios of at least HK$8 million ($1 million).
In addition, Hong Kong’s regulator said it is open to future reviews on property rights for tokenized assets and the legality of smart contracts, and that it is exploring a number of pilot projects to test the potential benefits of digital assets and their applications in the financial markets.
These projects are said to include non-fungible token (NFT) issuance for Hong Kong Fintech Week 2022, Green bond tokenization, and Hong Kong’s own central bank digital currency (CBDC).
The regulator said it is ready to “engage with digital asset exchanges globally” and invited them to “set foot in Hong Kong for new business opportunities” under its new licensing regime for VA Service Providers.
The move comes in stark contrast to the actions of mainland China; the People's Bank of China (PBOC) enforced a blanket ban on all cryptocurrency in September 2021, a position it has not given any indication it is set to relent on.
Hong Kong and crypto ETFs
The consultation will also explore the possibility of offering digital asset-based Exchange Traded Funds (ETFs) in the region.
“The Securities and Futures Commission will be conducting a public consultation on how retail investors may be given a suitable degree of access to VA [virtual assets], and Hong Kong will be open to the possibility of having exchange-traded funds (ETFs) on VA in our market,” Monday’s government statement said.
The statement added that, “The Government, in conjunction with the financial regulators, are working towards providing a facilitating environment for promoting sustainable and responsible development of the VA sector in Hong Kong.”
And Hong Kong’s Securities and Futures Commission SFC today for the first time said it was “prepared to accept applications for authorization of VA futures ETFs.”
Bitcoin or crypto ETFs are products that allow the traditional investor to have a stake in digital assets without having to own the asset. This is because an ETF tracks the price of a given asset and investors can buy shares.
Crypto ETFs have proved popular among retail investors because they allow them to invest in cryptocurrency without having to deal with things deemed complicated by traditional investors—like digital asset storage.
ETFs are a popular investment product, with ETFs issued covering products such as real estate and foreign currency—but while several countries have launched ETFs that track crypto spot prices, the U.S. SEC has so far resisted calls to approve one.
Crypto futures ETFs that track derivative contracts that speculate on the future price of digital assets like Bitcoin and Ethereum do exist in the U.S.—and have proven to be very popular
Hong Kong's struggling economy
Hong Kong is working hard to rebuild its status as a fintech hub after it was rocked by risk following Covid-19 lockdowns, political turmoil and regulation—leading crypto startups to set-up shop elsewhere.
The territory's GDP contracted 4.5% in the third quarter 2022, which some have attributed to disruptions to cross-boundary land cargo operations, as the region’s Covid-19 restrictions are still incredibly strict by international standards.
Hong Kong's position as a financial centre may also be changing. The city slipped to fourth place in the Global Financial Centres Index’s top five, with Singapore, its rival financial hub in the region, taking its place.
The city’s stock exchange, the Hang Seng Index, is down almost 35% so far in 2022, and Hong Kong only last month axed its hotel quarantine.
FTX, one of the biggest digital asset exchanges, was one major crypto company that left Hong Kong, instead choosing the Bahamas as its base citing regulatory matters for the move.
Back in 2018, the city introduced a voluntary licensing regime that limited crypto platforms to institutional clients with portfolios worth at least HK$8 million ($1 million).
But now Hong Kong is looking to be crypto-friendly again; a crypto ETF is a tool that attracts investors who typically aren’t involved in the world of digital assets.
The news comes as Singapore also deals with the challenges of regulating and onboarding new crypto exchanges.
According to reporting by Nikkei Asia, 170 businesses applied to the Monetary Authority of Singapore (MAS) for licenses to offer digital payment token services and 100 were denied.