BTC ETF approval ‘increasingly likely,’ EU targets crypto links, HK launches stablecoin consultation

Going into the New Year, with firms continuing to wait for the regulatory greenlight, the approval of Bitcoin indexed products by the Securities and Exchange Commission has been described as “increasingly likely” by an investment bank. In Europe, a top regulator has admitted that crypto’s role among non-banking financial institutions will come under greater scrutiny. And Hong Kong became the latest jurisdiction to explore stablecoin regulation when it launched a consultation examining the issue. Here’s our fortnightly wrap of the most important news.

Bitcoin ETF approval ‘increasingly likely’ for SEC

The approval of a Bitcoin-based ETF, or exchange traded fund, by the US’s Securities and Exchange Commission is now “increasingly likely” due to political pressure, according to an investment bank. TD Cowen has claimed in new research the regulator cannot afford to fall behind the rapid pace of crypto innovation being made in other jurisdictions.

Several firms have filed to launch spot Bitcoin ETFs in the States, investment vehicles designed to give investors direct exposure to the current market price of Bitcoin. None have so far been approved by the SEC, which is currently facing a deadline of 10 January to approve or reject an application from ARK Investment and 21 Shares.

In a note from the investment bank’s research arm, last week analyst Jaret Seiberg wrote: “We believe the SEC does not want to risk more litigation over its refusal to approve Bitcoin ETFs given its recent court losses in crypto-related challenges… The SEC needs to cement its authority over an important part of the crypto market before Congress starts serious work on legislation.”

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All eyes are on the SEC as its 10 January deadline nears, with the consensus among many commentators and analysts being that the regulator will begin approving spot Bitcoin ETF applications from this date.

This is potentially seismic as the names that have filed Bitcoin ETF applications include several major investment houses on Wall Street, such as BlackRock and Fidelity. These firms are eager to participate in the crypto space but want to do so with normal regulatory protections. ETFs offer these firms a natural route to do so, as these kinds of funds have become increasingly prevalent, with assets in US ETFs surging from $102bn in 2002 to $6.4trn in 2022.

US firms have had to wait for some time to access Bitcoin in a strategy as direct as a spot ETF. Numerous applications have been rejected in the past, while such strategies have been approved in Canada. Wall Street will be even more motivated to launch spot Bitcoin ETFs as the cryptocurrency has had a strong start to 2024, surpassing $45,000 for the first time since 2022.

Crypto in EU regulators’ crosshairs?

Crypto assets in Europe could come under further regulatory scrutiny, following comments by one of the EU’s top regulators. José Manuel Campa, Chair of the European Banking Authority (EBA), recently told the media he was concerned about cryptos being beyond regulatory reach.

In his comments, Campa raised specific concerns about the lack of oversight for crypto exposure when discussing links between bank and non-bank financial institutions, or NBFIs. Importantly, NBFIs can include crypto firms and exchanges.

Campa said: “We should be doing more, and we are going to be doing more. We need to have an understanding of the whole underlying chain in NBFIs.”

This work will include biennial stress tests on European lenders with the EBA working with the European Systemic Risk Board and Financial Stability Board. The former is the eurozone’s financial stability watchdog, while the latter oversees global financial stability.

In a statement, the EBA confirmed it would be conducting this work “with a view to assessing opportunities and risks and identifying any areas where actions may be needed to promote supervisory convergence or to address any identified regulatory issues.”

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Campa’s comments follow a challenging year for banks, when worries about cryptocurrencies and financial stability were again raised. In March 2023, major crypto lenders Silvergate Capital and Signature Bank failed within days of one another. This then led to the collapse of Silicon Valley Bank, which had significant exposure to crypto firms and suffered $42bn in withdrawals.

The collapse of Silicon Valley Bank spread contagion fears that another banking crisis was looming. Though this didn’t come to fruition – with many banks proving to be better capitalized than in 2008 – it has caused regulators to further scrutinize the relationship between cryptos and bank stability.

This increases the likelihood of further crypto regulation in Europe. In 2023, consultations were launched for the Markets in Crypto-Assets Regulation, or MiCA, in the EU. This is designed to cover crypto assets currently not regulated and is scheduled for implementation in the summer of 2024.

Hong Kong launches stablecoin regulation consultation?

Hong Kong became the latest jurisdiction to explore the regulation of stablecoins when it launched a legislative proposal on the issue at the end of December 2023.

This has been launched by the Financial Services and Treasury Bureau, responsible for developing and executing government financial policy in Hong Kong, and the jurisdiction’s financial regulator Hong Kong Monetary Authority.

Running until the end of February 2024, the consultation will gather industry views on legislative proposals to regulate stablecoin issuers in Hong Kong. A key part of this will be the requirement to license issuers, which would have to be based in Hong Kong and have capital of at least HK$25m ($3.2m) or 2% of the stablecoin issuance, whichever is higher. Additionally, the regulator is introducing a sandbox for stablecoin issuance in Hong Kong to ascertain if these tokens are fit-for-purpose.

Eddie Yue, CEO of the Hong Kong Monetary Authority, said: “We are supportive of financial innovation and believe that it is essential to put in place the necessary regulatory guardrails and standards to enable the long-term, sustainable and responsible development of the virtual asset ecosystem.”

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This consultation is the latest development in Hong Kong’s emergence as one of the fastest-growing crypto hubs in Asia. Data from Chainalysis shows an estimated $64bn in crypto was traded in Hong Kong between June 2022 and June 2023, not far behind the $86.4bn traded in China over the same period.

Hong Kong has benefited from being an established financial hub to begin with, but authorities in the jurisdiction – which has limited autonomy from mainland China – have made numerous overtures to encourage crypto innovation.

This has included rules that allow retail crypto trading with a regulated environment and the establishment of an over-the-counter crypto market. Notably, this regulatory approach is made under the “same activity, same risks, same regulation” model.