Hong Kong's crypto spot ETF move beats regional peers

The inclusion of cryptocurrency Ether, alongside Bitcoin, for the exchange-traded funds on the Hong Kong Stock Exchange, contrasts with the US approach.

Hong Kong’s financial regulator signalled its commitment to bolster the city’s position as a cryptocurrency hub after several local asset managers announced their intention to proceed with applications for virtual asset licenses.

Investment managers including Bosera Asset Management, Harvest International, and China Asset Management Company have been launching, through their Hong Kong subsidiaries, exchange traded funds (ETFs) that will hold cryptocurrencies.

The move reflects the Securities and Futures Commission’s (SFC) ongoing pursuit to facilitate cryptocurrency as a professional asset class, said Matthew Le Merle, founder of Blockchain Coinvestors, speaking to FinanceAsia. While he expected additional supervision from the SFC to promote the market’s long-term and sound development, the initial “heavy lifting is now completed.”

Permitting spot crypto ETFs to trade on the Hong Kong Stock Exchange (HKEX) builds on the virtual asset’s global acceptance in recent months. Back in January of this year, the US Securities and Exchange Commission (SEC) led the charge by first greenlighting spot Bitcoin ETFs. Previously in December 2022, Hong Kong permitted Bitcoin and ether future ETFs on the exchange.

While future ETFs track price movement and hold contracts, spot ETFs would allow investors to directly own bitcoin through a fund that trades on a regulated exchange without needing to also own a separate digital wallet.

The inclusion of Ether ETFs

The SFC has also approved Ether ETFs, the world’s second largest cryptocurrency after Bitcoin with a market cap of $380 billion at the end of April. Ether’s inclusion sets the tone for the other digital tokens as they become accessible on SFC authorised virtual asset trading platforms, commented Eva Chan, partner and head of Hong Kong office, Simmons & Simmons, in response to FA.

“This announcement positions Hong Kong as a front-runner ahead of Asia and the US,” noted Chan, emphasising how the SFC’s decision contrasts with the SEC. Despite Hong Kong’s spot ETF decision coming months after the US regulator, Chan expects to see the authorisation of new ETFs tracking larger cryptocurrencies in the city-state, a move that will open the door for additional digital tokens.

Coininvestor’s Le Merle agreed. He said that while the US has yet to fully embrace innovation legislation and regulation, other financial centres are more receptive to such advancements, pointing to London’s adoption of ether ETN (exchange-traded notes) as an example.

But Le Merle explained that ether’s inclusion is not a blanket approval to all virtual assets. “Every tokenised asset is unique, just like currencies, commodities, and asset backed securities, meaning each one has to be reviewed on its own merits.”

He added that Hong Kong’s inclusion of ether speaks volumes, as the US regulatory environment lacks a consensus on how to categorise or classify Ether (also known as Ethereum).

Capital boost 

Crypto experts are optimistic that the new spot ETFs will draw capital into Hong Kong. But most are still unsure whether Chinese mainland investors will participate, since owning cryptocurrencies, such as Bitcoin, are prohibited in China.

“In reality, many very wealthy mainland Chinese businesses have Hong Kong entities,” noted Le Merle, “and thus may already hold bitcoin and ether offshore as well, [so, at the minimum] these ETFs provide a means to build on their allocations and simplify their custody and trading activities.”

Le Merle expected greater clarity from both China and Hong Kong in the future, which would enhance confidence among the global crypto community. While the SFC has yet to release a statement about spot ETFs, the regulator published a speech in Chinese on the initial trading day, mirroring language used by SEC Chair Gary Gensler back in January, underscoring caution to the public when investing.

“We are confident in Hong Kong’s vision to develop in a Web3.0 hub,” commented John Fei Zeng, chief financial officer of Tiger Brokers, which is providing access to online trading in the Special Administrative Region. “Hong Kong is one of the pioneering international financial centers introducing comprehensive regulations for virtual asset and fostering a trading-friendly environment,” he added.

Despite a recent slip, Bitcoin has climbed more than a third in value this year. Analysts have noted that besides the approval for new spot ETFs, Bitcoin’s halving event in early April, where the rate of newly mined bitcoin falls to limit the new supply entering the market, has supported its market value.

In a note to clients, Nigel Green, CEO of deVere Group wrote, “these financial instruments are set to absorb billions of dollars’ worth of Bitcoin, further reducing its available supply and increasing demand… taking more than $12 billion in net inflows since the first Bitcoin ETF was launched just three months ago.”

For more analysis on cryptocurrency ETFs see here.

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