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

Following the approval of the US Bitcoin spot ETF, Hong Kong has also won another victory.

On April 15, China Asset Management (Hong Kong), Bosera Asset Management (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. This also marks that Hong Kong has become the second jurisdiction in the world after the United States to approve such products.

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 that was still under discussion at one time, gaining a first-mover advantage, 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 introduction of policies, there has been little discussion, and there seems to be a sense of stagnation. Will the listing of this ETF change this situation?

In any case, with the listing of the ETF, Hong Kong's crypto wheel 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 its 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 is not unexpected. As early as December last year, when the market was in a critical period of ETF application swing, the Hong Kong Securities and Futures Commission issued the "Circular on the SFC's Approval of Funds Investing 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. For example, Harvest International, which was the first to apply, announced on January 26 that it had become an applicant for the Bitcoin spot ETF.

On April 10, Reuters reported that Bitcoin spot ETFs 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's "First Line" also reported 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 Funds and Value Partners. The entire Bitcoin spot ETF project has been communicated and planned in detail 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 Hong Kong virtual asset management funds. Among them, China Asset Management and Harvest Global 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. Bosera Fund and Value Partners do not yet have independent licensed persons in charge, so they need to seek cooperation with licensed exchanges or other institutions for 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 limitation of capital channels and market capacity, the crypto market developed rapidly, but its foundation was unstable. Later, due to a number of fraud incidents, public awareness collapsed. Previously, it once proposed to regulate OTC transactions. After the application for licensed exchanges was closed this year, the market discussion continued to decline, and its influence was far less than that of the absolute dominant country, 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 once again put on the spotlight. 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. However, 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 relatively few headquartered companies.

In this context, for Hong Kong, the passage of ETFs can directly broaden investment channels, reduce regulatory resistance, and promote the further migration of Hong Kong's old money 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 sound regulatory mechanism, and the license application is still closed, and other frameworks will follow up; the second is that the United States has already tested the waters first, which has cleared certain regulatory obstacles.

But for the applicant institutions, 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 capital 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 Bitcoin ETFs listed in Hong Kong may release up to $25 billion in demand. The report believes that as mainland investors take advantage of the Southbound Connect program, if the Hong Kong-listed Bitcoin spot ETF is approved, up to $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 will it face restrictions on foreign exchange funds, but it will also have to deal with KYC problems. In terms of bank card opening and exchange account opening, it is almost impossible for mainland participants to participate.

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 subscriptions in ETFs, and only cash subscriptions are used. In the cash model, the fund shares correspond to cash during the creation and redemption of ETFs. The issuer purchases physical BTC with cash and adds cash custodians in the process, thereby reducing the number of intermediaries that come into contact with actual Bitcoins. Building a relatively closed system makes each transaction of market makers easier to track, reduces anti-money laundering issues, and excludes 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 assets is BTC physical assets, which has a more rapid response to liquidity and price direction, and the issuer bears less risk responsibility and is more convenient to operate. Correspondingly, the market risk transmission is increased. However, Hong Kong has also accepted this method of subscription and redemption. According to Foresight, the two virtual asset spot ETFs jointly issued and managed by HashKey Capital and Bosera 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 virtual asset licenses No. 1 and 7 from the Hong Kong Securities Regulatory Commission. Although both of them once faced a situation where they were well-received but not popular due to problems such as high license costs, few currencies listed, and low offshore competitiveness, and 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, considering the differences in market size, the scale of custody is still inevitably limited. Take Hashkey as an example. Its custody business has been operating stably for more than a year, with custody assets exceeding 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, the issuers of virtual asset futures ETFs in Hong Kong will face challenges. Compared with spot ETFs, futures ETFs are restricted by contract extensions and transaction procedures. Although the net value and profit 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 capital outflows are likely to occur in the future. Perhaps to absorb traffic, during the recent conference, the issuer of futures ETFs, Southern East Investment, 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 the world is paying attention to the shortage of 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 struggling to survive, from an optimistic perspective, this also represents the broad potential of Hong Kong's cryptocurrencies. Adam Zhou, co-founder of Hong Kong cryptocurrency company VDX, once said in an interview, "There will definitely be a unicorn in Hong Kong's crypto industry."

This is not an empty statement. Compared with the current crypto ecosystem 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 leads the world. On the brokerage channel side, Robinhood has grown significantly, and cryptocurrency revenue has long been higher than stock trading revenue. However, Hong Kong, whether it is local exchanges or brokerages, is only in its 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 currency 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 seize the beachhead and more than 60 securities firms have entered the competition. The trend has arrived, and Pathfinder may be the first to try it out.

However, the market reaction to this news was flat, and the overall market was not greatly affected. Bitcoin is now at $66,244, up 3.19% in 24 hours. However, the concept sector rose significantly, and the Hong Kong concept currency rose by 10.6% in 24 hours.