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Hong Kong mulls permitting spot ETFs tied to digital currencies after JPEX

Hong Kong is toying with the idea of allowing retail traders access to exchange-traded funds (ETFs) that invest directly in digital assets as part of its efforts to become a leading Web3 hub.

In an interview with Bloomberg, Securities and Futures Commission (SFC) head Julia Leung disclosed that the commission has its eyes peeled on spot ETFs but will be careful before giving its full approval.

For Leung, spot ETFs working with digital currencies must satisfy the SFCs regulatory requirements designed to protect investors, stating that the Commission’s approach is “consistent regardless of asset.”

“We welcome proposals using innovative technology that boosts efficiency and customer experience,” said Leung. “We’re happy to give it a try as long as new risks are addressed.”

Regulators worldwide are wary of digital currency spot ETFs for several reasons, including the risks of volatility, tracking errors, sky-high management fees, and theft by cybercriminals. However, for all its downsides, the SFC may be drawn to the potential tax benefits, liquidity, and convenience associated with the asset class to consider approving.

Currently, Hong Kong has given the green light for future-based ETFs and is currently home to three of such products with combined assets surpassing $60 million. However, skeptics argue that the high-profile collapses of digital asset companies in previous months may dampen the enthusiasm of investors as they predict a lackluster debut.

For many industry players, the SFC’s interest in spot ETFs is unsurprising, given the steady flow of policies by the city’s financial regulator. In under one year, Hong Kong unveiled a comprehensive digital currency framework to regulate the activities of service providers, introduced a new licensing regime, and issued ancillary regulations.

In late October, the SFC gave the green light for intermediaries to offer digital asset services to retail investors with several ground rules.

“The policy is updated in light of the latest market developments and enquires from the industry seeking to further expand retail access through intermediaries and to allow investors to directly deposit and withdraw digital assets to/from intermediaries with appropriate safeguards,” read the SFC’s circular.

Mirroring the US

Analysts argue that Hong Kong’s renewed interest in spot ETFs may be linked to the changing regulatory climate in the U.S., with enthusiasts bracing for the U.S. Securities and Exchange (SEC) to approve the offering in the coming months.

“Before anything else happens, we get a second round of comments, and I believe we’ll probably get those comments in the next one to three weeks,” said Valkyrie Investments Chief Investment Officer Steven McClurg. “A late November approval likely means a February launch.”

An approval by the U.S. SEC is widely expected to open the floodgates of similar approvals in several other jurisdictions, with investors mulling a potential bull run in coming weeks.

Watch: What’s next for digital asset exchanges & investment?

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