Digital Assets & Virtual Assets
RWA Tokenisation in Hong Kong: Legal Framework and Structuring Guide
Introduction
Hong Kong made history in April 2024 by approving the first spot Bitcoin and Ethereum exchange-traded funds (ETFs) in Asia, ahead of similar products in other major financial centres. The launch of these products represented a significant step in Hong Kong's strategy to establish itself as the leading regulated virtual asset hub in the Asia-Pacific region.
This article explains the legal and regulatory framework governing spot virtual asset ETFs in Hong Kong, the authorisation process, and the key structural and investor protection requirements that apply.
Background: From Futures to Spot
Prior to April 2024, Hong Kong had already permitted the listing of virtual asset futures ETFs (tracking Bitcoin and Ether futures contracts) on HKEX, following SFC authorisation. These products were authorised for retail investor access, subject to risk disclosure requirements.
The authorisation of spot virtual asset ETFs — products that directly hold Bitcoin or Ether rather than futures contracts — marked a further evolution. Spot ETFs more accurately track the actual price of the underlying virtual asset and avoid the basis risk and roll costs associated with futures-based products.
SFC Authorisation Framework
Spot virtual asset ETFs in Hong Kong are SFC-authorised products under the Code on Unit Trusts and Mutual Funds. The SFC issued specific circulars setting out the conditions for authorisation of virtual asset spot ETFs, which include:
Eligible Virtual Assets
Initially, the framework covers Bitcoin (BTC) and Ether (ETH). Other virtual assets may be considered in the future, subject to SFC approval on a case-by-case basis, taking into account factors such as market liquidity, the quality of reference price benchmarks, and regulatory maturity.
Product Structure
Spot virtual asset ETFs must be structured as unit trusts or in-kind redemption structures (where authorised participants can create and redeem ETF units using virtual assets, not just cash). The in-kind redemption mechanism is important as it allows the ETF to more accurately track the spot price of the underlying asset.
Custody Requirements
Custody of the underlying virtual assets is a critical structural element. The SFC requires:
- The custodian must be a regulated entity with appropriate virtual asset custody capabilities
- Segregated client asset accounts
- Cold storage for the vast majority of assets
- Robust cybersecurity and key management protocols
Management and Valuation
ETF managers must be SFC-licensed Type 9 (asset management) entities with demonstrated virtual asset expertise. Valuation of the fund's virtual asset holdings must use recognised price references (typically from regulated exchanges or index providers).
HKEX Listing Requirements
Virtual asset ETFs must be listed on HKEX under the HKEX Listing Rules applicable to ETFs. Listing requires a prospectus registered with the Companies Registry and an offering document complying with SFC authorisation conditions. HKEX has established a dedicated virtual asset product segment and worked with market makers to ensure adequate liquidity in the secondary market.
Retail Investor Access
Unlike many markets where spot Bitcoin ETFs were initially restricted to professional investors, Hong Kong's spot virtual asset ETFs are accessible to retail investors. This reflects the SFC's approach of permitting access at the product level while ensuring robust product-level safeguards (custody, valuation, disclosure). Brokers distributing these products are required to assess client suitability.
Tax Treatment
Hong Kong does not impose capital gains tax. Gains on disposal of virtual asset ETF units are generally not subject to Hong Kong profits tax for individual investors not carrying on a trade or business in such products. Institutional investors should take advice on their specific tax position.
How Alan Wong LLP Can Assist
Alan Wong LLP advises asset managers, ETF sponsors, custodians, and institutional investors on the legal and regulatory aspects of virtual asset ETFs and other regulated virtual asset products in Hong Kong. We assist with SFC authorisation applications, product structuring, custody arrangements, offering documentation, and ongoing regulatory compliance. Our team is at the forefront of Hong Kong's virtual asset regulatory developments and can provide timely, authoritative advice.
