On Friday the two main Hong Kong financial regulators updated their position on how intermediaries should provide cryptocurrency or virtual asset services. A circular from the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) reiterates that retail investors need to be trained and tested on their knowledge. And it imposes financial limits on investment depending on wealth. This reinforces its previous position that came into force in June.
However, it also adds restrictions on exchange traded products (ETPs) and funds (ETFs), blocking retail investment in foreign spot ETFs. It reiterates similar concerns to the Unites States SEC that the pricing of crypto is unreliable and subject to manipulation. Hence the U.S. SEC and Hong Kong SFC prefer ETFs based on trading at regulated derivative exchanges supervised by regulators. For example, Hong Kong allows retail investors to buy ETFs based on CME derivatives. However, only professional investors can buy spot crypto ETFs or ETPs available in Canada, Europe and elsewhere.
In the United States, a judge observed that crypto spot prices drive derivative prices. Hence, there’s some debate about the difference in pricing risks. However, custody risks are likely to be less for crypto derivative ETFs.
Based on these pricing concerns and the different standards for regulating cryptocurrency exchanges and intermediaries in other jurisdictions, Hong Kong considers foreign spot ETFs as complex products not suitable for retail investors.
Intermediaries offering services to clients are only allowed to provide crypto services via SFC-licensed platforms, of which there are only two – OSL and HashKey. Bloomberg recently reported tha OSL might be up for sale, but the parent BC Technology subsequently stated this was false.