Author: Xiao Sa team; Source: Xiao Sa lawyer
On April 15, 2024, three fund companies successively announced through social media that they had been approved to issue ETF financial products that can invest in spot Bitcoin and spot Ethereum. The news immediately triggered a reaction in the global capital market. As the fastest and furthest along in the operation of crypto asset financial capital in Asia, Hong Kong has added fuel to the crypto bull market with its own strength.
Today, the Sister Sa team will analyze Hong Kong's crypto policy from the perspective of the significance of Bitcoin and Ethereum spot ETFs being approved for issuance in Hong Kong online for investors, and then help everyone make more rational judgments.
01 Background of the Approval of Hong Kong Bitcoin/Ethereum ETF
Not long ago, the US Securities and Exchange Commission approved more than a dozen Bitcoin spot ETFs at one go, which became a milestone in the crypto asset market. Now, as a pioneer in crypto assets in Asia, Hong Kong has also approved the issuance of crypto asset ETF products (including Bitcoin and Ethereum), which not only provides more choices for investors, but also provides an opportunity for the further integration of traditional capital markets and the crypto world.
For Hong Kong citizens, Hong Kong Bitcoin/Ethereum ETF means that local residents can directly use securities accounts to purchase spot Bitcoin and Ethereum without opening an account in a crypto asset exchange.
(I) Clear information was disclosed before the issuance of Hong Kong crypto asset spot ETF
In fact, the Hong Kong SFC had already given clear information about the spot of crypto asset ETFs half a year ago. On December 22, 2023, the SFC issued the "Circular on the Hong Kong Securities and Futures Commission Authorizing Funds to Invest in Virtual Assets" and the "Joint Circular on Virtual Asset-Related Activities of Intermediaries". In the two circulars, the SFC clarified the relevant regulations on the issuance and management of public fund products with virtual assets accounting for more than 10%, and also made requirements in terms of the subscription, redemption, custody, and valuation of crypto assets. The "Circular on the Hong Kong Securities and Futures Commission Authorizing Funds to Invest in Virtual Assets" also clearly pointed out that Hong Kong may approve spot ETFs for mainstream crypto assets such as Bitcoin and Ethereum, and users can choose to subscribe and redeem with cash or crypto assets.
Therefore, for those who are familiar with the regulatory direction of crypto assets in Hong Kong, it is actually not surprising that Hong Kong has been approved through Bitcoin and Ethereum spot ETFs. In terms of the selection of crypto asset exchanges, according to public channel information, among the approved funds, two have chosen OSL, while the other has chosen to work with HashKey. It can be seen that the huge advantages of OSL and HashKey as licensed crypto asset trading platforms approved to allow retail customers to trade have begun to show. It is worth mentioning that HashKey Capital Limited ("HashKey Capital"), a crypto asset investment institution under HashKey, has recently obtained the SFC's No. 9 license upgrade and has obtained professional investor exemptions, which allows it to provide services to a wider range of users.
(II) What is the difference between crypto asset spot ETFs in Hong Kong, my country and the United States?
The Sister Sa team believes that the differences between crypto asset spot ETFs in Hong Kong, my country and those in the United States are mainly the following two points:
1. Different underlying assets
The scope of crypto asset ETFs approved by the SFC in Hong Kong, my country is larger than that in the United States, including not only Bitcoin spot ETF transactions, but also Ethereum spot ETF transactions. Among the more than ten crypto asset spot ETFs approved by the United States in January 2024, only Bitcoin, a single crypto asset, is included. There is currently no news about the approval of other crypto asset ETFs. In the previous analysis article, the Sister Sa team has explained that US regulators have always maintained a cautious attitude towards crypto assets. The Sister Sa team believes that the simultaneous approval of Bitcoin and Ethereum ETFs is a huge leap forward for Hong Kong regulators. It is not only a pioneering move, but also a major encouragement to the Web3 industry and the world of crypto assets. 2. Different subscription and redemption methods In terms of subscription and redemption methods, ETFs in Hong Kong, my country can not only use cash subscription and redemption, but also use crypto assets for direct subscription and redemption. In simple terms, Bitcoin or Ethereum can be used to directly purchase SEF assets. Compared with ETFs in the United States, this move is obviously more "Web3". However, the Sister Sa team pointed out that at the specific operational level, the use of crypto assets to subscribe for ETF products will inevitably be subject to stricter supervision, especially for the subscription and redemption of large-scale crypto assets, which needs to comply with the strict KYC of Hong Kong financial institutions.
02 What does Hong Kong crypto asset ETF mean to investors?
The Sister Sa team mainly introduces the advantages and disadvantages of Hong Kong crypto asset ETF.
(I) Advantages of Hong Kong crypto asset ETF
1. Low technical threshold for investment. Hong Kong crypto asset spot ETF can be traded directly on the Hong Kong Stock Exchange in a similar way to traditional securities, without the need for more complicated registration and KYC on major crypto asset trading platforms in Hong Kong. This move greatly reduces the technical threshold for crypto asset trading. At the same time, due to the problem of capital volume, traditional stock exchanges have higher liquidity than most existing crypto asset trading platforms, and relevant regulatory measures are more complete.
2. The security of crypto assets is relatively higher. Simply put, buying crypto asset spot ETFs does not require actual holding and storage of Bitcoin, Ethereum and other assets, and investors no longer have to worry about losing their stored cryptocurrency private keys (a client served by the Sajie team once lost a large number of Bitcoin private keys due to improper storage).
3. Tax benefits. From a more realistic perspective, investing in crypto asset spot ETFs can also obtain certain tax benefits under certain circumstances. Specifically, it is relatively certain that the legal nature of crypto asset spot is "securities", but other jurisdictions (especially jurisdictions that have begun or are planning to impose taxes on crypto assets) have the situation of treating cryptocurrencies such as Bitcoin and Ethereum as "property". In the case that Hong Kong agrees to directly purchase spot crypto asset ETFs with cryptocurrencies, high property taxes can be avoided by replacing crypto assets with spot ETFs. In addition, assuming that the underlying crypto asset bull market can last for a long time, it can also enjoy the low tax preferential policies of various jurisdictions that encourage long-term holding of securities.
(II) Notes on Crypto Asset Spot ETFs
1. Crypto asset spot ETFs cannot avoid the investment risks of crypto assets themselves. Investors need to understand that crypto asset spot ETFs are just an investment tool and cannot isolate the investment risks of crypto assets themselves. Of course, crypto asset ETFs themselves are investment portfolios, and multiple investment targets can dilute the risks of crypto assets, but risks always exist.
2. Investment time difference. Crypto asset ETFs are not crypto assets themselves, but an investment product that dynamically fluctuates by tracking and anchoring the prices of underlying crypto assets. Then there is a risk of investment time difference. In other words, if the crypto asset ETF itself cannot anchor the price of crypto assets very timely, then it is very likely that the ETF will be temporarily decoupled from the crypto assets, causing investors to miss investment opportunities in the crypto ecosystem where "one day in the currency circle is one year in the real world".
03 Written at the end
In short, the approval of ETF is a historic event for the Hong Kong crypto asset market. It means that Hong Kong has effectively fulfilled its commitment to "embracing crypto assets" and has taken another step towards becoming a crypto asset financial center. For investors, ETFs have lowered the technical threshold for Hong Kong investors to invest in crypto assets. This investment method with higher security and greater tax benefits is more in line with the interests of relevant investors in the long run. For the traditional capital market, at a time when my country's economic development is under pressure, the advantages of crypto assets as an emerging investment product are enough to attract some funds to favor them.
At present, as long as the funds are in Hong Kong, they can directly purchase crypto asset spot ETFs, but due to legal regulations, my country's securities firms cannot directly access this product for the time being. Although there are no clear regulatory guidelines, referring to Hong Kong's previous consistent policies, residents in mainland my country may still not be able to purchase directly. Of course, the approval of this ETF is just the beginning of this milestone product, and its subsequent development will remain to be seen in the future.
JinseFinance
Huang Bo
Alex