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News/Hong Kong Pioneers Bold Move into Crypto with Bitcoin and Ether ETF Approvals

Hong Kong Pioneers Bold Move into Crypto with Bitcoin and Ether ETF Approvals

Van Thanh Le

Apr 15 2024

last month3 minutes read
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Crypto Craze Hits Hong Kong: SFC Greenlights Spot Bitcoin and Ether ETFs

Hong Kong's Securities and Futures Commission (SFC) has taken a significant stride, conditionally approving the first batch of spot Bitcoin (BTC) and Ether (ETH) Exchange-Traded Funds (ETFs). This landmark move positions the region as a global financial technology hub, reflecting its ambitions to embrace cryptocurrency-based investment products.

The approved ETFs will be managed by “at least three” prominent asset managers, including Harvest Fund Management, Bosera Asset Management, China Asset Management (ChinaAMC), etc., each with a substantial presence in Hong Kong. Unlike the cash-create model prevalent in the United States, these spot ETFs will operate on an in-kind creation mechanism. This innovative approach allows for direct contributions of BTC and ETH to issue new shares, enhancing liquidity and mitigating common market frictions associated with cash settlements.

Patrick Pan, OSL's board chairman and CEO, highlighted the advantages of this in-kind subscription model, stating that it "enhances market liquidity by allowing the direct exchange of the asset for ETF shares, reducing reliance on cash settlements and facilitating uninterrupted trading flows." This approach, he noted, aligns with practices in traditional asset ETFs.

Analysts and stakeholders express a strong conviction that the introduction of these ETFs will attract significant capital inflows to Hong Kong's digital asset market. It is also expected to provide a regulated avenue for both retail and institutional investors to engage more robustly with cryptocurrencies.

Although specific launch dates have not been confirmed, preparations are actively underway, with an anticipated launch window by the end of April, as suggested by market activities and stakeholder announcements. This development not only positions Hong Kong as a leading center for financial innovation but also potentially sets a precedent for other global financial markets to follow in integrating cryptocurrencies within regulated investment frameworks.

Modern cryptocurrency trading floor with diverse traders and holographic displays.webp

Following the announcement, the crypto market reacted positively, with an immediate uptick in the prices of Bitcoin and Ethereum. This response underscores the market's sensitivity to regulatory developments and the high anticipations surrounding such financial products.

The approvals by the Hong Kong SFC reflect a progressive regulatory approach, focused on safely integrating digital assets into the mainstream financial ecosystem while ensuring stringent compliance and oversight.

Hong Kong's Bitcoin and Ether ETFs: Cautious Optimism Amid Regulatory Embrace

The Hong Kong Securities and Futures Commission's (SFC) conditional approval of the region's first spot Bitcoin (BTC) and Ether (ETH) Exchange-Traded Funds (ETFs) has sparked enthusiasm within the cryptocurrency community. However, sober analysis suggests that the anticipated inflows may not be as substantial as initially speculated.

Bloomberg's senior ETF analyst, Eric Balchunas, provides a measured outlook, suggesting that these ETFs would be "lucky to get" around $500 million in total flows, far below the speculated $25 billion. This contrasts with the exuberant forecasts often prevalent in the crypto community.

The Hong Kong ETF market is relatively small, estimated at $50 billion, which could limit the scale of potential inflows. However, the approved ETFs, managed by prominent firms like China Asset Management and HashKey, are noteworthy for their inclusion of Ether and the use of in-kind redemptions, which can offer lower transaction costs and reduced risks compared to their U.S. counterparts.

Hong Kong's strategy aims to establish the region as a leading digital asset hub, with the success of these ETFs potentially dependent on the participation of mainland Chinese investors through the Southbound Connect program. This program allows qualified mainland investors to invest in wealth management products through Hong Kong banks.

Yet, the high fees associated with these ETFs, ranging between 1-2%, could be a deterrent, as they are considerably higher than those found in the U.S. market. Such fees, along with a less liquid and efficient market ecosystem in Hong Kong, could lead to wider spreads and premium discounts on these ETFs.

Despite China's ban on certain Bitcoin activities, the approval of regulated products like these ETFs indicates a nuanced stance towards virtual currencies, suggesting potential implications for global Bitcoin demand and trading dynamics. This might attract significant diversification opportunities amidst concerns about the Chinese property market and stock performance.

Hong Kong's Bitcoin and Ethereum ETFs Expected to Launch on April 30

Hong Kong's highly anticipated spot Bitcoin and Ethereum exchange-traded funds (ETFs) are set to take the financial markets by storm. Expectedly scheduled for launch by April 30th, these ETFs have received conditional approval from the city's Securities and Futures Commission (SFC), paving the way for their trading by the end of the month. 

Initial projections estimate that these ETFs could attract significant capital inflows, potentially reaching up to $25 billion, contingent upon access by Chinese investors, said 10x Research founder Markus Thielen. However, more conservative estimates from Bloomberg analysts suggest a more realistic expectation of around $1 billion in inflows over the first two years, owing to the restricted access for Chinese mainland investors and the relatively smaller size of the Hong Kong ETF market compared to the United States.

Despite the potential for high demand, mainland Chinese investors are likely to be excluded from participating in these ETFs, analysts predicted. This exclusion is a continuation of China's strict regulatory framework on cryptocurrencies, which banned the trading and mining of digital assets in 2021. The barring of Chinese investors reflects ongoing reservations about cryptocurrency within China's financial policies, posing a notable challenge to the ETFs' broader market impact.

Based on the context, Bloomberg's analysts sentiment suggests that while these ETFs are a positive development, they are not expected to be a game-changer in the broader context of global cryptocurrency markets.

However, the new ETFs could still serve institutional investors, particularly those who are constrained to trade cryptocurrencies through ETFs due to regulatory or policy restrictions. This could also benefit traders by extending trading hours through the inclusion of the Hong Kong market, thus offering longer periods for trading activities across different time zones, said QCP Capital.

bitcoin-hong-kong.webp

Interestingly, some analysts believe that despite the official stance, the introduction of these ETFs in Hong Kong might be an exploratory step by China to gauge the integration of cryptocurrency within regulated financial environments. This is viewed against the backdrop of China using Hong Kong as a testing ground for new financial technologies and regulations.

The success of these ETFs in Asia might also differ from Western markets due to different investment practices. In Asia, particularly in China, there is a preference for direct investments over diversified asset baskets like ETFs. However, because these ETFs represent single assets (Bitcoin and Ethereum), they might appeal more to regional investors who favor direct stakes.

Conclusion

Hong Kong's landmark approval of spot Bitcoin and Ether ETFs positions the region as a global hub for crypto-based investment products. While cautious optimism surrounds these ETFs, their success may hinge on attracting mainland Chinese investors and overcoming higher fees compared to the U.S. market.

FAQs

1. What makes Hong Kong's new crypto ETFs unique compared to their U.S. counterparts?

The Hong Kong ETFs will use an in-kind creation mechanism, allowing direct contributions of BTC and ETH to issue new shares. This enhances liquidity and mitigates issues like cash settlements that can plague U.S. crypto ETFs.

2. What are the potential challenges facing the success of these Hong Kong crypto ETFs?

The relatively small size of Hong Kong's ETF market, higher management fees compared to the U.S., and potential liquidity constraints could limit the scale of inflows. Attracting mainland Chinese investors will be crucial for driving substantial assets under management.

3. How might the approval of these crypto ETFs in Hong Kong impact the global cryptocurrency market?

The Hong Kong ETFs could leverage Bitcoin as a hedge against renminbi devaluation and as a geopolitical tool, potentially influencing global Bitcoin demand and trading dynamics. Other jurisdictions may follow Hong Kong's lead in approving regulated crypto investment products.

4. What are the key advantages of Hong Kong's in-kind creation model for these crypto ETFs?

The in-kind creation model allows for direct exchanges of BTC and ETH to issue new ETF shares, enhancing liquidity and reducing reliance on cash settlements. This approach better aligns with practices in traditional asset ETFs, potentially improving trading flows and mitigating common market frictions.

This article has been refined and enhanced by ChatGPT.

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