Regulation
Restrictive OTC Regulations for Institutions Amid ETF Launch in Hong Kong
Hong Kong has become a key player in the race to become Asia’s leading crypto hub, as it spear the first spot crypto ETFs in the region on April 30 with a contribution from the first day of more than 130 million dollars on Bitcoin and Ethereum. To better understand the implications of this milestone and the evolving Hong Kong virtual asset landscape, CryptoSlate spoke with HB Lim, Managing Director of APAC for BitGo.
Lim brings a wealth of regulatory and crypto industry experience to the conversation. Prior to joining BitGo, a leading institutional cryptocurrency custody provider, he was Director of Abu Dhabi Global Market, where he helped shape its progressive crypto regulatory frameworks. Lim previously held positions at the Monetary Authority of Singapore regulating financial institutions.
In this exclusive interview, Lim shares his views on how Hong Kong’s ETF spot offerings could impact market forces and investor participation in the region. It also assesses Hong Kong’s overall virtual asset regulatory framework and how it compares to other competitors vying to become Asia’s crypto hub, such as Singapore and the United Arab Emirates.
Lim provides candid insights on areas where Hong Kong’s crypto regulations could be improved, such as creating licensing options for independent custodians and calibrating rules for institutional over-the-counter trading desks. He also discusses his outlook for digital assets in Hong Kong and APAC as well as BitGo’s plans to support the region’s growing ecosystem in the coming years.
With Hong Kong spot ETFs set to launch on April 30, what impact do you think will have on the region’s crypto market dynamics and investor participation?
Currently, the main markets for spot crypto ETFs are in North America and Europe. This means that these ETFs are not available for trading during a large portion of trading hours in Asia, which is incongruous with the 24/7 market that is crypto. As such, having spot crypto ETFs in Hong Kong provides investors with more comprehensive trading hours to access crypto.
Additionally, some investors may prefer not to trade crypto spot ETFs listed in North America or Europe for reasons such as less favorable taxes or restrictions imposed by their home country’s regulator. Hong Kong spot crypto ETFs offer another option for those investors who might find Hong Kong offers more advantages in terms of taxes and regulatory access.
The offering of spot crypto ETFs in Hong Kong will strengthen liquidity in Hong Kong’s crypto markets and give rise to a growing supporting ecosystem of crypto exchanges, crypto custodians, banks, brokers and professional services.
Given your regulatory experience, how do you assess Hong Kong’s overall virtual asset regulatory framework? Can it find the right balance between innovation and investor protection?
Hong Kong has developed an extremely comprehensive and robust regulatory framework for virtual assets, and is to be commended for this. Nevertheless, some areas could be improved, such as the need to create a regulatory framework for independent custodians of virtual assets to provide an additional option for custody, and calibrating Hong Kong’s proposed regulatory framework for OTC trading of virtual assets.
Currently, virtual asset exchanges in Hong Kong are only allowed to use virtual asset custody services provided by an affiliate. Banks that wish to provide virtual asset custody but outsource this service are only permitted to use virtual asset custody services provided by a Hong Kong-licensed virtual asset exchange or other Hong Kong-licensed bank. Virtual asset exchanges and banks in Hong Kong are currently not allowed to use independent third-party virtual asset custodians, limiting options in the market. There is currently no HK SFC or HKMA licensing regime for independent virtual asset custodians in Hong Kong.
A thriving Web3 industry requires the support of independent and specialized 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, Hong Kong could also benefit from the development of a regulatory framework allowing independent custodians of virtual assets to be licensed, thereby providing a complementary option to the custody of virtual assets in Hong Kong.
Regarding over-the-counter trading, Hong Kong recently released a consultation paper proposing to regulate over-the-counter trading of virtual assets. The proposals appear rather restrictive as they propose to allow OTC trading desks to offer only crypto-fiat trading pairs and limit the cryptocurrencies that can be traded to only those approved for trading on approved exchanges in Hong Kong. The proposals appear more targeted at physical stores in Hong Kong offering retail customers the ability to buy and sell crypto assets, and the proposals appear less suited to institutional over-the-counter trading desks that do not deal with retail customers and who maintain strict compliance. programs including Know-Your-Customer controls. Over-the-counter trading proposals could perhaps benefit from a separate regime for institutional over-the-counter trading desks, which would recognize the lower risks these desks pose.
With Singapore and the UAE also vying to become Asia’s leading crypto hub, how do you think Hong Kong’s spot ETF offerings will strengthen its competitive position?
Hong Kong offering spot crypto ETFs will likely attract more Web3 businesses, investors and talent to put down roots in Hong Kong, leading to a virtuous cycle of growth in the Web3 ecosystem there.
What excites you most about the future of digital assets in Hong Kong and the APAC region, and how does BitGo plan to contribute to this evolution in the years to come?
Virtual asset wallets are the gateway and foundation of Web3, and virtual asset wallet and custodial 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 optimistic about the adoption and growth of Web3 in Hong Kong and the rest of the APAC region. As a company that prioritizes security and regulatory compliance, we look forward to continuing to contribute to the web3 ecosystem in Hong Kong and the rest of APAC through our thought leadership and supporting the businesses with our safe and reliable virtual asset wallets and premium brokerage services.