Hong Kong’s monetary regulator is urgent forward with its plan to open the marketplace for cryptocurrency futures funds to retail traders.
A spokesperson for the Securities and Futures Fee (SFC) informed AsianInvestor the regulator is happy with its just lately launched guidelines for crypto fund approval and believes they’re adequate to safeguard traders from substantial losses, regardless of the massacre seen within the wake of the latest FTX scandal.
The FTX cryptocurrency trade, valued at $32 billion earlier this yr, has entered chapter proceedings as its founder and former CEO, Sam Bankman-Fried, stays embroiled in a misuse-of-funds scandal. The collapse of the trade carries wide-ranging results for traders, together with Singapore’s Temasek, which has written off its $275 million funding in FTX.
There could be little doubt that cryptocurrencies are nonetheless very a lot a speculative asset. Traders in Grayscale Bitcoin Belief, the world’s largest cryptocurrency fund, have seen its NAV decline by 83% since bitcoin peaked in November 2021.
Contagion is the largest unknown threat for traders on this market. Grayscale additionally suffered knock-on results from the failure of Three Arrows Capital, a Singapore-registered crypto hedge fund that filed for chapter in July.
Hong Kong-based fund trade veteran and former senior advisor at Citigroup Stewart Aldcroft informed AsianInvestor it was proper to query whether or not retail traders ought to be capable of purchase into crypto merchandise resembling ETFs.
RETAIL RISKS
“I suppose any regulatory approval, resembling by the SFC, would require retail merchandise to return with detailed well being warnings and presumably greater minimal subscription ranges. However then once more, traders will all the time discover a manner after they need to purchase one thing, and crypto has that impact on many,” Aldcroft stated.
One threat is that traders might erroneously consider that by investing not directly, by way of crypto futures, they’d be protected against the market’s excessive fluctuation. Knowledge from the US confirmed traders put a web $379 million into crypto funds in 2022, regardless of quite a few scandals which have befallen corporations within the trade.
Aldcroft believes youthful traders are probably the most in danger, as they might extra “willingly experiment with the place they put their cash, and primarily based on the idea that many extra conventional funding areas haven’t carried out so effectively lately.”
The G20’s Monetary Stability Board has stated “the latest turmoil in crypto-asset markets highlights their intrinsic volatility, structural vulnerabilities and rising interconnectedness with the standard monetary system.
“An efficient regulatory framework should be sure that crypto-asset actions posing dangers just like conventional monetary actions are topic to the identical regulatory outcomes, whereas taking account of the novel options of crypto-assets and harnessing their advantages.”
The SFC’s present place on regulating crypto funds was set out by deputy chief government officer Julia Leung throughout Hong Kong Fintech Week in October. In her remarks, she stated, “the excesses of sure crypto corporations threaten not simply their very own well-being, but additionally that of traders and your entire crypto ecosystem.”
EXPONENTIAL INCREASE
When the SFC first launched its regulatory framework for digital belongings (VA) in 2018, the crypto market was nonetheless comparatively new, and entry was restricted to skilled traders.
“4 years have now handed,” stated Leung, “and whereas crypto belongings stay risky, their international market capitalisation has elevated exponentially. From our personal product survey, we notice that traders purchased HK$10 billion in VA funds by way of abroad platforms in 2021, up from HK$8 million a yr earlier. Traders now have a greater understanding of the dangers of buying and selling these belongings.”
Reflecting this perceived sophistication amongst traders, the SFC had been actively seeking to arrange a regime to authorise ETFs which might present publicity to mainstream digital belongings together with the suitable investor guardrails. Leung disclosed that digital asset futures ETFs could be topic to extra necessities associated to its administration firm, funding technique, disclosure and investor training
A fund administration firm providing a VA futures ETF, for instance, could be anticipated to undertake an energetic funding technique to permit flexibility in portfolio composition, together with a various array of futures positions with a number of expiry dates. The web spinoff publicity of such an ETF mustn’t exceed 100% of the ETF’s complete web asset worth, in keeping with the regulator.
Product disclosures ought to include upfront details about key dangers related to VA futures resembling margin threat and threat related to necessary measures imposed by related events. Within the preliminary stage, the SFC expects underlying belongings to be confined to Bitcoin futures and Ether futures traded on the Chicago Mercantile Trade.
An earlier SFC round does acknowledge that “ a part of the VA ecosystem (for instance, VA buying and selling platforms) remains to be not topic to the identical strong regulation as service suppliers or merchandise in conventional monetary markets,” and thus “funding merchandise that make investments instantly in spot VAs could proceed to current investor safety points.”
Following this month’s crypto market ructions, Hong Kong’s regulator seems to not have dominated out strengthening laws. “The SFC could think about introducing extra necessities or situations as deemed crucial or applicable within the discharge of its features,” a spokesperson informed AsianInvestor.
The spokesperson was unable to touch upon any crypto ETF functions thus far acquired for authorisation.
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