Virtual asset spot ETF will be launched. Can Hong Kong take advantage of the situation to break through?

The Bitcoin spot ETF and Ethereum spot ETF approved by Harvest Global, China Asset Management (Hong Kong) and Bosera International will be launched at the end of the month. This is of great significance to Hong Kong. Hong Kong dares to be the first. This is the first approved virtual currency spot ETF in Asia, and not only the Bitcoin spot ETF has been approved, but also the Ethereum spot ETF is ahead of the approval process in the United States.

Previously, Hong Kong had launched futures ETFs for Bitcoin and Ethereum, and some asset management companies had also tried virtual asset-related funds. On December 22, 2023, the Hong Kong Securities and Futures Commission issued a circular on the approval of funds by the Securities and Futures Commission to invest in virtual assets, which stated that the regulator is ready to accept applications for approval of other funds involving virtual assets, including virtual currency spot ETFs.

Less than four months after the circular was issued, three companies' products were approved. How did this efficiency come about? What does the launch of virtual currency spot ETF mean for Hong Kong's traditional finance? What details of virtual currency spot ETF are worthy of investors' attention?

Futures, funds, securities firms, asset management, traditional finance has already tried Web3

Before the spot ETF, Hong Kong had already made some attempts to combine virtual currencies with traditional financial markets.

In December 2022, CSOP Asset Management Co., Ltd. launched the first batch of virtual asset ETFs in Asia: CSOP Bitcoin Futures ETF (3066.HK) and CSOP Ethereum Futures ETF (3068.HK). They were officially listed on the Hong Kong stock market in the same month. The sub-fund mainly invests in Bitcoin futures of the Chicago Mercantile Exchange (CME).

In terms of fund net value performance, the futures ETF product launched by Southern Asset Management's Hong Kong subsidiary Southern East Investment, FA Bitcoin, soared against the backdrop of poor profitability and low investor sentiment in the Hong Kong stock market in 2023. In 2023, FA Bitcoin's net value increased by 1.34 times. Against the backdrop of a doubling of the fund's net value, FA Bitcoin's annual return has exceeded 50% in the first four months of 2024.

In addition, CSOP’s Bitcoin Futures ETF has the highest return rate among all ETFs in Hong Kong in 2023. With a scale of 35 million yuan, it is also the largest ETF.

In addition to high returns, the most critical indicator for the survival of ETF products is trading volume. The average daily trading volume of FA Southern Bitcoin in the past month has remained around HK$30 million, which is a considerable level.

In addition to CSOP, Samsung Bitcoin Futures Active ETF will also be launched in January 2023.

Many established brokerage firms have already tried their hand at virtual currency-related businesses. VDX Chief Strategy Officer Paolo once revealed that previously, the monthly virtual currency-related trading volume at Victory Securities reached billions of yuan.

Some asset management companies that originated from the cryptocurrency circle have also made some attempts. For example, in 2021, New Fire Asset Management established Hong Kong's first compliant virtual currency fund with an active management strategy. Jessica Soong, deputy director of business development at New Fire Asset Management, told Golden Finance reporters that the virtual currency fund will have an annualized return of 55% in 2023.

Shrouded in the shadow of the "remains of an international financial center", Hong Kong's traditional finance needs to find a breakthrough for business growth. For the cryptocurrency industry, compliance and embracing mainstream finance have also become a main development theme of the blockchain industry in recent years.

However, it is not easy to conduct virtual currency spot ETF, whether for traditional finance or native cryptocurrency institutions.

No experience to follow, win-win cooperation is needed

The root of the problem is that there is almost no experience to follow in this matter. From the government to the institutions, they all need to practice and explore continuously.

The three fund companies that were approved this time are spot ETFs, namely Harvest Global, China Asset Management (Hong Kong), and Bosera International. These three institutions are all important big brothers in the traditional financial field.

Market insiders close to Harvest told Golden Finance reporters that two years ago, Harvest International established an investment and research department related to virtual currency, which was only involved in research and had no specific business at the time.

After the Hong Kong government issues the "Policy Declaration on the Development of Virtual Assets in Hong Kong" in October 2022, the virtual currency-related departments of Harvest Global will no longer just conduct industry research, but will begin to communicate more with Hong Kong regulatory authorities, learn about relevant policies, laws and regulations of other countries, and follow up on policies and take action at any time.

Market insiders close to Harvest said that after the release of the "Policy Declaration on the Development of Virtual Assets in Hong Kong", Harvest International has been in contact with relevant regulatory authorities. Currently, Harvest International is also planning Hong Kong stablecoin-related businesses.

Harvest Global was the first to submit an application in January 2024 and became one of the first approved institutions. The main reason for its success may be that it has been paying attention to and following up on the applications for spot ETFs in European, Asian and American countries and has rich experience in issuing ETFs.

Applicants need to submit a set of ETF issuance plans to the CSRC, such as how users subscribe, how to trade, how to carry out risk control, investor protection, and anti-money laundering.

There are two difficulties. The first is how to design the plan, especially how to apply for redemption. Most institutions will get stuck at this step. The second is where to find the service providers involved in the whole process.

Taking service providers as an example, Shengli Securities is currently a participating securities dealer (PD) of these three Bitcoin spot ETF issuers, and is also the only VA (virtual asset) ETF physical delivery broker in the market.

The ETFs issued by China Asset Management (Hong Kong) and Harvest Global ETFs are deployed in cooperation with OSL Digital Securities Co., Ltd. HashKey applied for ETFs together with Bosera Funds (International), and HashKey participated in it as a custodian.

Take Shengli Securities as an example. As the PD of three ETF issuers, its role is to subscribe, create and redeem ETF units within the product framework of ETF.

At the same time, customers can directly subscribe to ETFs with cryptocurrencies through Victory Securities. Victory Securities is the only brokerage in Hong Kong that has achieved coin-in and coin-out transactions without going through an exchange. Currently, only a few brokerages have successfully upgraded their No. 1 license to virtual asset trading, and upgrading the No. 1 license is the first step to being able to provide this service.

Market insiders close to Harvest said that Harvest International was the first company in Hong Kong to run through the spot ETF process and the first to submit an application to the Securities Regulatory Commission. China Asset Management and Bosera borrowed from Harvest's application. Harvest believes that this is a direct cooperation. After all, Hong Kong's compliant virtual currency business is a blue ocean now, and cooperation can make the pie bigger.

According to Hong Kong's qualification requirements for issuing spot ETF managers, they are as follows: 1. Have a good regulatory compliance record; 2. Have at least one competent employee with experience in virtual asset and related product management; 3. Hold an upgraded No. 9 license.

Although there are as many as 2,000 asset management companies with Hong Kong's Type 9 license, only a dozen or so have upgraded their licenses to Type 9.

In this case, cooperation is the only way to achieve a win-win situation. When it comes to entering Web3, or more precisely, in the matter of spot ETFs, what we need to do more is to make the pie bigger together and then share the results.

The largest market is still in mainland China

It is worth noting that compared with the Bitcoin spot ETF in the United States, Hong Kong has an additional channel to subscribe for spot ETF shares on the exchange using virtual currency spot.

An anonymous Hong Kong securities industry practitioner told Golden Finance that this is because Hong Kong has a licensed exchange that has opened up the channel. For people in the industry, this is also a compliant deposit and withdrawal channel.

Chen Peiquan, executive chairman of Victory Securities, believes that physical subscription does not require waiting for transactions between banks or dealers, because the original legal currency involves the action of buying VA again for trading, and the closing time of physical transactions is longer than that of cash. Therefore, physical subscription can enjoy time advantages.

In recent years, the decline of Hong Kong stocks has basically not improved. By the end of 2023, the total market value of Hong Kong stocks is about 31 trillion Hong Kong dollars. By 2023, Hong Kong stocks have fallen for four consecutive years. On the other hand, European and American funds have withdrawn and liquidity has shrunk. Even in 2023, Hong Kong was once ridiculed as the "relic of the international financial center."

Some people believe that Hong Kong stocks have entered a slow bear market, and the reason is that the soil has deteriorated. As Hong Kong gradually changes from an international financial center to an ordinary Chinese city, foreign capital will leave the Hong Kong financial market. A specific example of foreign capital withdrawal is that the main pension fund of the US federal government announced that it would exclude stock investments in China and Hong Kong from its $68 billion international fund.

Tony Luk, investment director of New Fire Asset Management, said that after the launch of the Bitcoin spot ETF, the daily inflow is expected to be around US$10 million to US$20 million. Considering the small scale of the Hong Kong ETF market and limited trading volume, large inflows will take some time, and the initial daily inflow will not be too large. The spot ETF is expected to have a volume of around US$1 billion to US$2 billion.

Currently, the overall size of Hong Kong ETFs is only US$50 billion, and Bitcoin ETFs have limitations such as high transaction costs. In this light, US$2 billion is already a relatively high size in the Hong Kong market.

At present, the scale of Bitcoin spot ETF of BlackRock alone has exceeded 10 billion US dollars. The United States itself accounts for more than 80% of the Bitcoin spot ETF market, ranking first, while Canada, which ranks second, only accounts for 7%, with a specific volume of about 3 billion US dollars. If Hong Kong can reach 2 billion US dollars, it will also rank high in the world.

Although 2 billion is a drop in the bucket for the overall financial market in Hong Kong, embracing Web3 is a positive move by the government to revitalize Hong Kong's financial industry and is worthy of encouragement. Although mainland Chinese residents are currently not allowed to purchase virtual currency spot ETFs, it is foreseeable that mainland China will become the largest market for virtual currency spot ETFs as policies continue to open up.

Tony Luk told Golden Finance reporter that if the mainland market can be successfully connected, the scale is expected to have room for growth, but the growth rate also depends on policy progress, and the scale of US$5-10 billion may be reached.

At a time when Hong Kong is gradually being abandoned by European and American capital, actively embracing the mainland market can truly revitalize virtual currency spot ETFs. Of course, this is not something Hong Kong can decide.