Regulation

Following the approval of the first spot BTC ETF in the U.S., Hong Kong is poised to make a similar move, with reports indicating that 10 financial institutions in the region are gearing up to submit applications for launching BTC ETFs.

Harvest Hong Kong, one of China’s major fund managers, took the lead by filing a spot Bitcoin ETF application with the Hong Kong Securities and Futures Commission (SFC) on January 26, as per Tencent News. The regulatory body is actively expediting the approval process, aiming to launch the first Hong Kong spot Bitcoin ETF shortly after the Chinese New Year on February 10.

While Harvest Fund is the first to seek approval for a spot BTC ETF, it’s anticipated that more institutions will follow suit. The SFC may adopt a strategy similar to the U.S. SEC, approving multiple spot ETFs to ensure fair competition. Notably, at least 10 financial institutions in Hong Kong have expressed their intent to launch spot BTC ETFs in 2024, with some, like Venture Smart Financial Holdings, targeting the first quarter of the year for their launch.

Additionally, existing crypto companies in Hong Kong that have already introduced futures-based crypto ETFs are expected to join the race for spot Bitcoin ETF approvals. Samsung Asset Management, the creator of the Samsung Bitcoin Futures ETF in 2023, has expressed openness to exploring the possibility of launching a spot ETF.

Hong Kong has gained prominence as a leading crypto destination in Asia, thanks to its regulator’s pro-crypto stance in 2023. The SFC introduced crypto-focused regulations, enabling both institutional and retail investors to engage in crypto activities. Even before the U.S. SEC greenlit the first spot BTC ETF, the Hong Kong SFC paved the way for crypto-based ETFs, expressing readiness to receive applications for various funds, including digital asset spot ETFs and existing crypto futures ETFs.

Hong Kong is gearing up to establish a more adaptable framework for cryptocurrency exchange-traded funds (ETFs), despite the United States leading in both approval speed and market size, according to experts.

The proposed regulations for spot cryptocurrency ETFs in Hong Kong differ significantly from those approved in the US. One key distinction is that Hong Kong plans to permit both cash and in-kind subscriptions. This means that dealers participating in ETFs can use bitcoin directly to subscribe to or redeem shares. In contrast, the US only allows such transactions with cash.

This divergence in approach highlights differences in virtual asset regulatory frameworks. The US Securities and Exchange Commission (SEC) appears hesitant to involve licensed dealers in bitcoin transactions for subscribing to and redeeming ETF shares due to the unregulated nature of spot bitcoin trades in the US, as explained by Andrew Fei, a partner at King & Wood Mallesons in Hong Kong.

Regulators in Hong Kong recently announced their intention to grant retail access to spot virtual asset ETFs and are open to applications from funds seeking to offer such products to the public.

In the wake of the success of nine spot bitcoin ETFs in the US, including those offered by BlackRock and Fidelity, which garnered nearly US$2 billion in their first three days of trading, participants in Hong Kong’s virtual asset industry are urging the government to expedite approval for the city’s own offerings.

Legislative Council member Johnny Ng Kit-chong expressed the hope that Hong Kong can swiftly secure a global position amid the competitive landscape of the virtual asset sector. He emphasized the importance of being a frontrunner in implementing relevant policies and products in Asia.

While SEC Chair Gary Gensler acknowledged the approval of spot bitcoin ETFs, he clarified that the regulator did not endorse bitcoin, characterizing it as a speculative and volatile asset used for illicit activities. Fei pointed out that the SEC remains skeptical due to the largely unregulated nature of the spot bitcoin market in the US.

In contrast, Hong Kong’s regulated environment for spot virtual asset transactions on licensed platforms has made the Securities and Futures Commission (SFC) more comfortable with virtual asset ETFs, according to Fei. The joint plan by the SFC and the Hong Kong Monetary Authority to authorize spot cryptocurrency ETFs has instilled optimism in the industry about Hong Kong’s potential as a cryptocurrency hub.

Dmitry Lapidus, a senior liquid analyst at CoinFund, highlighted Hong Kong’s regulatory adaptability, positioning it well in the evolving digital assets landscape. Kennix Chan, executive director at Victory Securities Company Limited, expressed confidence that Hong Kong’s clear vision on regulating virtual assets would contribute to its role as a global financial hub.

Despite these positive prospects, experts noted that Hong Kong would face formidable competition from the US, particularly considering the substantial size of the American cryptocurrency market and the presence of finance giants such as BlackRock, Fidelity, Franklin, and Invesco. Jack Poon, a professor at the Hong Kong Polytechnic University, pointed out the advantages these US institutions have, including a vast existing customer base, a trusted brand, and low fees that may pose challenges for issuers in Hong Kong in the long run.

Crypto industry insiders express concern over the stringent anti-money laundering rules recently agreed upon by European Union policymakers.

While the objective is to create a level playing field between crypto firms and banks, some argue that the new rules are more restrictive for digital asset firms.

The regulations include robust customer verification requirements and measures to address risks related to self-hosted wallets and cross-border transfers.

Despite efforts to keep non-fungible tokens (NFTs) and decentralized finance (DeFi) out of the regulatory scope, the finalized Anti-Money Laundering Regulation (AMLR) may still impact the crypto sector. While the regulatory package is not yet final, concerns linger about potential restrictions on privacy-enhancing tools.

The crypto industry continues to navigate discussions, anticipating technical talks on the AMLR details to commence soon.

In the legal battleground of cryptocurrency regulation, Judge Katherine Polk Failla of the Federal Southern District of New York presided over a five-hour hearing that holds the potential to shape the regulatory destiny of the $1.7 trillion cryptocurrency industry.

Coinbase, the largest U.S. crypto exchange, sought dismissal of an SEC lawsuit asserting that it operated as an “unregistered broker-dealer” in trading unregistered digital assets, violating securities laws.

The SEC, acting as Wall Street’s watchdog, urged Failla to deny Coinbase’s motion, contending that the exchange blatantly violated securities laws. The agency advocated an immediate commencement of discovery for an upcoming trial. Legal experts predict Failla could take two to six weeks to make a decision, and the outcome might establish a critical precedent in U.S. crypto regulation.

If the court rules in favor of Coinbase, it could impede SEC Chair Gary Gensler’s efforts to regulate the crypto industry through enforcement actions. Gensler, since assuming the chairmanship, has initiated over fifty crypto enforcement actions for various rule violations. An SEC victory, however, would empower Gensler to continue his regulatory agenda.

The lawsuit alleges that Coinbase functioned as an unregistered broker, exchange, and clearing agency, offering thirteen tokens deemed “securities” by the SEC, necessitating registration akin to stocks or bonds. Coinbase counters that no tokens on its platform qualify as securities due to the absence of an underlying investment contract between token issuers and buyers in the secondary market.

Gensler has consistently argued that, except for Bitcoin and possibly Ethereum, most digital assets constitute securities under the 1946 Howey Test. The crypto industry contends that the current SEC registration process does not accommodate the intricacies of blockchain technology, and it calls for jurisdiction to be given to the Commodity Futures Trading Commission.

Failla expressed concerns about the SEC’s broad interpretation of what constitutes a security, emphasizing the importance of the case’s implications for future legal developments.

The debate extends beyond the courtroom, involving Congress and other legal cases. Recent rulings, such as U.S. Southern District Judge Torres’s decision on £XRP, highlight that while digital assets themselves may not be securities, their transactional nature could subject them to SEC oversight.

The ongoing regulatory discourse has caught the attention of Congress, with GOP Senator Cynthia Lummis advocating for the dismissal of the Coinbase suit. Lummis argues that such enforcement actions hinder the development of blockchain, the transformative technology underpinning crypto, and criticizes the SEC for overstepping its authority.

As the legal drama unfolds, Congress remains actively involved, with lawmakers seeking to establish regulatory rules for the evolving landscape of cryptocurrency.

Canadian securities regulators have introduced new proposals designed to enhance clarity and risk management for public investment funds involved in crypto assets. The suggested regulatory changes aim to impose restrictions on the activities of public investment funds in the realm of cryptocurrencies, establishing guidelines for the handling of crypto assets.

According to the proposed regulations, only alternative investment funds and non-redeemable investment funds would have the authorization to directly trade or hold crypto assets. For other mutual funds seeking exposure to cryptocurrencies, the avenue would be to invest in the aforementioned authorized funds.

Furthermore, the crypto assets in which funds are invested must be listed on an exchange recognized by a Canadian securities regulatory authority and must be fungible. These assets are also required to be insured and stored in cold wallets, subject to an annual assessment of the custodian’s internal management.

These proposed amendments are part of an ongoing initiative by the Canadian Securities Administrators (CSA) to establish a comprehensive regulatory framework for crypto assets in Canada. The proposals are open for public commentary for a duration of 90 days. Subsequently, a consultation paper will be developed, and a broader regulatory framework for crypto assets will be considered.

It’s worth noting that Canada has had spot Bitcoin exchange-traded funds (ETFs) since 2021, marking a prior foray into the crypto asset investment landscape.