Restrictive OTC regulations for institutions amid Hong Kong ETF launch

Currently, the primary markets for spot crypto ETFs are in North America and Europe. This means that such ETFs are not available for trading during much of Asian trading hours, which is incongruous with the 24/7 market that crypto is. As such, having spot crypto ETFs in Hong Kong provides investors with more complete trading hours to access crypto. 

In addition, some investors may prefer not to trade spot crypto ETFs listed in North America or Europe for reasons such as less favourable taxes or restrictions by their home country regulator. The Hong Kong spot crypto ETFs provide another option for such investors who may find Hong Kong provides more advantages with regard to taxes and regulatory access.

The offering of spot crypto ETFs in HK will deepen liquidity in HK crypto markets and give rise to a growing supporting ecosystem of crypto exchanges, crypto custodians, banks, brokers, and professional services.

HK has developed an extremely comprehensive and robust virtual asset regulatory framework, and should be lauded for that. Nonetheless, there are areas which could be enhanced, such as the need to create a regulatory framework for independent virtual asset custodians to provide an additional option for custody, and calibrating HK’s proposed regulatory framework for the OTC trading of virtual assets. 

Currently, virtual asset exchanges in HK are only allowed to use virtual asset custody services provided by a subsidiary company. Banks that wish to provide virtual asset custody but outsource this service are only allowed to use virtual asset custody services provided by a HK-licensed virtual asset exchange or another HK-licensed bank. Virtual asset exchanges and banks in HK are currently not allowed to use specialist third party independent virtual asset custodians, which limits options in the market. There is currently also no licensing regime by the HK SFC or HKMA for independent virtual asset custodians in HK. 

A thriving web3 industry requires the support of specialist independent virtual asset custodians. Virtual asset wallets are the gateway to web3, and proper custody and protection of virtual assets is essential to building trust in the industry. As such, HK could benefit from also developing a regulatory framework for independent virtual asset custodians to be licensed, providing a complementary option to virtual asset custody in HK. 

On the OTC trading front, HK has recently issued a consultation paper proposing to regulate OTC trading of virtual assets. The proposals appear rather restrictive in that they propose allowing OTC trading desks to only offer crypto-to-fiat trading pairs, and limit the crypto that can be traded to only those approved for trading on licensed exchanges in HK. The proposals appear more targeted at the brick-and-mortar shops in HK offering retail customers the ability to buy and sell crypto assets, and the proposals appear less suited to institutional OTC trading desks that do not deal with retail clients and which follow robust compliance programs including Know-Your-Customer checks. The OTC trading proposals could perhaps benefit from having a separate regime for institutional OTC trading desks which recognizes the lower risks such desks pose.

HK offering spot crypto ETFs will likely attract more web3 firms, investors and talent to sink roots in HK, leading to a virtuous cycle of growth in the web3 ecosystem there.

Virtual asset wallets are the gateway and foundation of web3, and virtual asset wallet and custody providers such as BitGo are crucial players in any web3 ecosystem. BitGo has been active in the APAC region for many years, and we remain bullish on web3 adoption and growth in Hong Kong and the rest of APAC. As a firm which places security and regulatory compliance first, we look forward to continuing to contribute to the web3 ecosystem in HK and the rest of APAC through our thought leadership, and supporting firms with our safe and trusted virtual asset wallets and prime brokerage services.