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January 18, 2024 β 01:15
Investment Research Team
Hong Kong regulators have given the green light for the launch of spot Bitcoin and Ethereum exchange-traded funds (ETFs) today. Fund managers such as China Asset Management (Hong Kong) Ltd, Bosera Asset Management (International) Co., and Harvest Fund Management have all made announcements confirming that they have received conditional approval from financial regulators in Hong Kong.
The decision by the Securities and Futures Commission of Hong Kong (SFC) to approve Bitcoin and Ethereum spot ETFs follows similar moves made earlier this year in the United States, making Hong Kong the second jurisdiction globally to introduce such products after the United States.
What sets the Hong Kong crypto ETFs apart is their comprehensiveness and investor-friendly features, offering both Bitcoin and Ethereum spot ETFs and permission for in-kind redemptions. In contrast, Bitcoin ETFs approved by U.S. regulators only support share redemption that turns the underlying crypto into cash for redemption.
China Asset Management is partnering with Hong Kong crypto exchange OSL for their ETF product, with China CITIC International serving as the custodian.
Harvest Management has also selected OSL as its primary virtual asset trading platform and custodial partner, while Bosera International is collaborating with Hong Kong crypto company HashKey Capital for joint issuance and management.
As early as last December, the Securities and Futures Commission of Hong Kong issued a circular on virtual assets, proposing to accept applications for virtual asset spot ETFs.
Subsequently, over 20 institutions began preparations for the crypto spot ETF market, with some submitting applications as early as January.
On April 10th, Reuters reported the possibility of a Bitcoin spot ETF launch in Hong Kong this month, with initial approval announcements potentially coming as early as next week.
Following today’s issuance of the first group of conditional approvals, it is anticipated that Bitcoin spot ETFs could be launched in approximately 10 days, around the end of April.
According to the official website of the Securities and Futures Commission of Hong Kong, there are currently 18 institutions listed in the Hong Kong Virtual Asset Management Fund list.
Among them, ChinaAMC and Harvest Global Investments have obtained virtual asset License No. 9, enabling them to independently manage portfolios with 100% investment in virtual assets and issue them autonomously.
Bosera Fund and Value Partners Group do not yet possess independent licenses and will need to seek cooperation with licensed exchanges or other institutions for the joint issuance of crypto ETFs.
While most ETFs primarily utilize an in-kind redemption process, where the underlying asset does not need to be sold, the approved Bitcoin ETFs in the U.S. require the ETFs to sell the underlying crypto into cash for redemption.
In-kind redemption typically offers faster liquidity and price reaction, with issuers assuming less risk responsibility and enjoying more convenient operations.
Hong Kong’s approval also includes Ethereum ETFs in addition to Bitcoin ETFs. The U.S. hasn’t approved Ethereum spot ETFs.
These features of future Hong Kong spot crypto ETFs may appeal to certain investors.
Hong Kong’s crypto market currently remains relatively small compared to major exchanges like Coinbase and Binance, which have listed 246 and 390 cryptocurrencies, respectively. HashKey Exchange, the leading crypto platform in Hong Kong, has only listed 21 cryptocurrencies.
In Hong Kong, OSL and HashKey are the only two crypto trading platforms with virtual asset licenses No. 1 and No. 7. HashKey’s custodial business has been steadily operating for over a year, with custodial assets exceeding US$2.2 billion. In contrast, as of the fourth quarter of 2023, Coinbase’s year-end custodial assets were US$101 billion, even before spot ETF products were introduced.
Despite facing challenges such as high license costs, limited currency listings, and low offshore competitiveness, both OSL and HashKey are poised to capitalize on new growth opportunities driven by ETFs, with custodial and trading fees expected to rise.
Both Hong Kong’s crypto exchanges and brokerage firms are still in their early stages. With over 20 institutions rushing to seize the opportunity and more than 60 brokerage firms entering the crypto ETF market, Hong Kong could experience significant growth if these products are successfully launched.
Spot bitcoin exchange-traded funds (ETFs) amassed net inflows of roughly US$12.1 billion by the end of the first quarter, with total assets across all products totaling US$54 billion, after the U.S. approved the world’s first groups of Bitcoin spot ETFs in January.
In recent years, Hong Kong has been striving to position itself as a regulated crypto hub, with its financial regulators actively working to provide necessary regulations for healthy development.
The latest initiative comes against the backdrop of crypto trading being effectively banned in mainland China following a major crackdown in 2021. Last June, Hong Kong introduced new regulations aimed at fostering the growth of the local crypto market, in addition to discussions on regulating the crypto over-the-counter (OTC) market.
However, these efforts faced challenges such as restrictions on fund channels and market capacity, as well as incidents of fraud that damaged public perception of the sector. The approval and launch of spot Bitcoin ETFs in the United States in January further highlighted Hong Kong’s sense of being left behind, as other regional centers like Singapore and Dubai gained influence in the crypto realm.
According to disclosures from regulatory authorities in Hong Kong, over 220 Web3-related companies from dozens countries and regions have established offices in Hong Kong. However, due to limitations in space and cost, most of these companies have set up operational or technical branches, with only a small number of employees.
The approval of Bitcoin and Ethereum spot ETFs has the potential to expand investment channels, reduce regulatory hurdles, and further incentivize the migration of traditional capital into the crypto space in Hong Kong. This move is expected to inject new vitality into the development of Hong Kong’s Web3 industry and bolster its reputation as an open player in the global crypto landscape.
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