Hong Kong's first batch of virtual asset spot ETFs approved by the Securities and Futures Commission

After the US Bitcoin spot ETF was approved, Hong Kong also won another victory.

On April 15, China Asset Management (Hong Kong), Bosera Funds (International) Co., Ltd., and Harvest Investments issued an announcement stating that they had obtained conditional approval from the Hong Kong Securities and Futures Commission (SFC) to issue Bitcoin and Ethereum spot ETFs, which also marked that Hong Kong became the second jurisdiction in the world to approve such products after the United States.

Compared with the United States, which has the greatest influence in the world and remains cautious due to various considerations, Hong Kong's virtual asset spot ETF is obviously more open. Not only did it include the Ethereum spot ETF, which is still under discussion, in one go, gaining a first-mover advantage, but it was also more inclusive than the United States in the design of the ETF mechanism.

But in terms of crypto influence, Hong Kong does not actually have an advantage under the siege of the Western world. Even in the past year, despite the frequent policies, there has been little discussion, and there is a sense of stagnation. Will the listing of this ETF change this situation?

In any case, with the listing of ETFs, the wheel of cryptocurrencies in Hong Kong has set sail again.

On April 15, China Asset Management (Hong Kong), Bosera Funds (International) Co., Ltd., and Harvest Investment successively issued announcements on their official accounts, announcing that they had obtained the principle approval of the Hong Kong Securities Regulatory Commission to issue Bitcoin and Ethereum spot ETFs. Among them, China Asset Management (Hong Kong) cooperated with OSL, and the custodian was BOC International Prudential Trusteeship Limited. Harvest Investment also chose OSL as the first virtual asset trading platform and custody partner, while Bosera International and HashKey Capital jointly issued and managed.

Looking at the timeline of this application, the approval of the ETF was not unexpected. As early as December last year, when the market was in a critical period of ETF application swing, the Hong Kong Securities Regulatory Commission issued the "Circular on the Securities Regulatory Commission's Approval of Funds to Invest in Virtual Assets", proposing to accept applications for virtual asset spot ETFs. Since then, more than 20 related institutions have begun to enter the spot ETF, with Harvest International, Bosera, China Asset Management and Shengli Securities as typical representatives. Taking Harvest International, the first to apply, as an example, it announced on January 26 that it had become an applicant for Bitcoin spot ETF.

On April 10, Reuters reported that Bitcoin spot ETF may be launched in Hong Kong this month, and the first list may be announced as early as next week. At the same time, Tencent Finance "First Line" also reported again that the Hong Kong Securities Regulatory Commission plans to announce the list of the first four Bitcoin spot ETFs in Hong Kong on April 15, including Harvest International, China Asset Management, Bosera Asset Management and Value Partners. The entire Bitcoin spot ETF project has made detailed communication and plans with the Hong Kong Stock Exchange in advance, and it is expected to be completed in about 10 days. The Securities Regulatory Commission originally planned to list the Bitcoin spot ETF in Hong Kong around April 25, no later than the end of April.

According to the official website of the Hong Kong Securities and Futures Commission, there are currently 18 institutions on the list of virtual asset management funds in Hong Kong. Among them, China Asset Management and Harvest International have obtained the No. 9 virtual asset license approved by the Securities and Futures Commission, which allows them to manage investment portfolios that are 100% invested in virtual assets and issue them independently. Boshi Fund and Huili Financial do not have independent licensed persons in charge, so they need to seek licensed exchanges or other institutions for cooperative issuance.

In the long run, this application is of far-reaching significance. After Hong Kong issued new regulations in June last year, due to the limitations of capital channels and market capacity, the crypto market has developed rapidly, but its foundation is unstable. Later, due to a number of fraud incidents, public perception collapsed, and it was proposed to regulate OTC transactions before. After the application for licensed exchanges ended this year, market discussion continued to decline, and its influence was far less than that of the absolute dominant party, the United States, while regional regions such as Singapore and Dubai continued to eat its share.

It was not until the Web3 Week that Hong Kong was pushed to the forefront again. According to the Hong Kong regulatory authorities, more than 220 Web3.0-related companies from more than 20 regions including the mainland, Europe and the United States have set up offices in Hong Kong. But in reality, due to space and cost constraints, despite the increase in offices, most companies only set them up as operations or technical divisions, retaining a small number of employees here, and there are fewer headquarters.

In this context, for Hong Kong, the passage of ETFs can directly broaden investment channels, reduce regulatory resistance, and promote Hong Kong's old money to further migrate to the encryption field, providing new vitality for the development of its Web3 industry, and once again enhancing Hong Kong's open image in encryption and enhancing its virtual asset competitiveness. As for why it was chosen to pass at this time, one is that it needs to occupy the first-mover advantage under the premise of a stable regulatory mechanism. The license application is still closed, and other frameworks will follow up; the second is that the United States has already tried it first, which has cleared certain regulatory obstacles.

But for the applicants, ETF applications represent more direct benefits. Taking the Bitcoin ETF in the United States as an example, as of April 15, according to SoSoValue data, the total net asset value of the Bitcoin spot ETF was US$56.22 billion, the ETF net asset ratio (market value to the total market value of Bitcoin) reached 4.26%, and the historical cumulative net inflow reached US$12.53 billion.

Such a huge amount of funds and assets will naturally make the issuer a lot of money, and will also attract other fund issuers. According to CoinDesk, Matrixport predicted in a report that a Bitcoin ETF listed in Hong Kong may release up to US$25 billion in demand. The report believes that as mainland investors take advantage of the Southbound Connect program, if the Bitcoin spot ETF listed in Hong Kong is approved, up to US$25 billion in funds may flow in from mainland China. Of course, according to current regulations, it is still difficult for the mainland to participate, not only facing restrictions on foreign exchange funds, but also dealing with KYC problems. In terms of bank card opening and exchange account opening, it is almost difficult for mainland participants to participate.

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Back to this application, in terms of mechanism, Hong Kong is undoubtedly more advanced than the United States.

The US authorities do not allow physical subscription in ETFs, and only use cash subscription. Under the cash model, the fund shares correspond to cash during the creation and redemption of ETFs. The issuer purchases BTC in cash and adds cash custodians in the meantime, thereby reducing the number of intermediaries that contact actual Bitcoins, building a relatively closed system to make each transaction of market makers easier to track, reduce anti-money laundering problems, and exclude the risks of banks and other financial institutions that actually participate in it. It can be seen that this move is more in line with traditional securities trading methods, and also shows the concerns and hesitations of US regulators about this product.

The corresponding fund share subscription and redemption of physical is BTC in kind, the liquidity and price direction react more quickly, the risk responsibility borne by the issuer is smaller, and the operation is more convenient, which corresponds to the increase in market risk transmission. However, Hong Kong has also accepted this type of subscription and redemption. According to Foresight, two virtual asset spot ETFs jointly issued and managed by HashKey Capital and Boshi Funds (International) Co., Ltd. will adopt a physical subscription mechanism, allowing investors to directly use Bitcoin and Ethereum to subscribe for ETF shares.

From the perspective of stakeholders, in addition to direct issuers, custodians have also become popular. Currently, OSL and Hashkey are the only trading platforms that have obtained the Hong Kong Securities Regulatory Commission's virtual asset licenses No. 1 and No. 7. Although both faced a situation of being well-received but not popular due to problems such as high license costs, few currencies listed, and low offshore competitiveness, OSL was even rumored to have been cut off by its parent company BC Technology Group to seek a transfer, but driven by ETFs, both will usher in new economic growth points, and custody fees and transaction fees are expected to break through.

However, judging from the differences in market size, it is still difficult to avoid restrictions on the custody scale. Take Hashkey as an example. Its custody business has been operating stably for more than a year, with custody assets of more than 2.2 billion yuan. As of the fourth quarter of 2023, Coinbase's year-end custody assets are 101 billion US dollars, which is not included in the current spot ETF scale. It is worth emphasizing that Coinbase custody almost 90% of the current spot ETF scale.

On the other hand, Hong Kong's virtual asset futures ETF issuers will face challenges. Compared with spot ETFs, futures ETFs are restricted by contract extensions and transaction procedures. Although the net value and money-making effect have been improved in the rising trend of Bitcoin in recent months, liquidity and price tracking are obviously difficult to reach spot ETFs, and there is a high possibility of capital outflow in the future. Or to absorb traffic, during the recent conference, the futures ETF issuer Southern East Ying placed advertisements on a large number of buses in Hong Kong, with the content of Bitcoin rising 45% in the first two months of 2024, and global attention is in short supply.

From the perspective of the development of the crypto industry in Hong Kong, an interesting comparison is that as of April 15, Coinbase has launched 246 currencies, Binance, the world's largest cryptocurrency exchange, has launched 390 currencies, but HashKey Exchange, the leading exchange in Hong Kong, has only listed 21 currencies.

Although it seems to be surviving in the cracks, from an optimistic point of view, this also represents the broad potential of Hong Kong's crypto. Adam Zhou, co-founder of Hong Kong cryptocurrency company VDX, once said in an interview, "There will definitely be a unicorn in the Hong Kong crypto industry."

This is not an empty statement. Compared with the current crypto ecology in the United States, the local compliant exchange Coinbase has an absolute advantage, with a market value of US$59.3 billion, and the offshore exchange Binance is the world leader. On the brokerage channel side, Robinhood has grown significantly, and its cryptocurrency revenue has long been higher than stock trading revenue. However, Hong Kong, whether it is local exchanges or securities firms, is only in the early stages. In theory, it is only a matter of time before more currencies are listed and more funds flow in. Under the influence of RWA, stablecoins and ETFs, more forms of listing will emerge, and even new types of large-scale digital asset exchanges will be born, which may contain a market of billions of dollars.

Perhaps this is also the reason why the Hong Kong government firmly supports the layout of virtual assets, more than 20 institutions are scrambling to grab the beachhead layout, and more than 60 securities firms have entered the competition. The trend has arrived, and Pathfinder may be the first to eat crabs.

However, the market reacted flatly to this news, and the market was not greatly affected. Bitcoin is now at $66,244, up 3.19% in 24 hours. However, the concept sector has risen significantly, and the general rise of Hong Kong concept coins in 24 hours reached 10.6%.