Huobi obtains fund license to build Hong Kong Grayscale. What obstacles are there?

Wu said the author | cici

Editor of this issue | Wu Talks about Blockchain

On March 4, Huobi Technology (01611.HK) issued an announcement stating that the Hong Kong Securities Regulatory Commission has granted a license to Huobi Asset Management, a wholly-owned subsidiary of the company, to carry out regulated activities of Category 4 (providing advice on securities) and Category 9 (providing asset management) as defined in Schedule 5 of the Securities and Futures Ordinance. Influenced by this news, HT rose 16% against the trend despite a sharp drop across the board.

Huobi Technology said that the Hong Kong Securities and Futures Commission has approved Huobi Asset Management to manage investment portfolios invested in virtual assets and continue to carry out the above-mentioned Category 4 and Category 9 regulated activities, effective March 3, 2021. Huobi Asset Management will issue three virtual asset funds, namely Bitcoin Tracking Fund, Ethereum Tracking Fund and Multi-Strategy Virtual Fund . There were many rumors about Hong Kong "Grayscale" and Singapore "Grayscale" before. Huobi started to lay out and recruit troops early on. This license can be regarded as a staged victory.

Grayscale Trust Fund, a US cryptocurrency giant, is undoubtedly an important indicator of the Bitcoin bull market in the past year. It has cryptocurrency funds such as Bitcoin, Ethereum, and Litecoin, with an astonishing total asset market value. Grayscale currently holds more than 650,000 Bitcoins, worth more than US$33.1 billion. Grayscale Bitcoin Trust Fund GBTC can be traded in the secondary market of US stocks, which is no different from stock trading.

In fact, it is very simple to buy Bitcoin in compliance with regulations in the United States. Grayscale's advantage lies not only in compliance, but also in the fact that it has designed a complex mechanism to attract institutional investors to enter the arbitrage. It can be seen that Grayscale's top buyers are not investing in Bitcoin, but hoping to arbitrage from GBTC.

Behind Grayscale is the Digital Currency Group, which owns Genesis (which holds the New York State BitLicense), Coindesk and Foundry. It has also directly invested in more than 160 cryptocurrency companies including Bitpay and Coinbase.

Looking back at the Asia-Pacific region, many institutions that are optimistic about the crypto market are eager to create an Asia-Pacific version of the "Grayscale" fund. Huobi is undoubtedly the company closest to DCG in terms of strength. Is the Asia-Pacific version of "Grayscale" possible? Will the next cryptocurrency ETF be launched?

Hongkong

The Hong Kong Securities and Futures Commission, which recently issued the first virtual asset trading platform license, actually had a long-term layout. In November 2018, the Hong Kong Securities and Futures Commission stated that it would regulate "virtual asset portfolio management companies and fund distributors." The Hong Kong Securities and Futures Commission will impose licensing conditions on funds that manage virtual asset portfolios in accordance with the existing financial institution licensing system, thereby conducting supervision. At the same time, the Hong Kong Securities and Futures Commission also gave a minimum exemption provision: only virtual asset portfolio management companies that invest 10% or more of the total asset value of the portfolio they manage in virtual assets are subject to supervision by the Hong Kong Securities and Futures Commission. In other words, fund companies that are currently operating legally in Hong Kong can also allocate cryptocurrencies in their portfolios, as long as they do not exceed 10% of the total asset value.

However, the 10% exemption is destined to be far from the size of Grayscale's assets. Currently, virtual asset investment funds that are not subject to the 10% investment limit and are subject to the supervision of the Hong Kong Securities Regulatory Commission include MaiCapital and Arrano Capital, which are only open to professional investors according to regulations. MaiCapital holds license No. 4 (providing advice on securities) and license No. 9 (providing asset management), while Arrano Capital's parent company, EBO Capital Asia, holds license No. 1 (securities trading), license No. 4 and license No. 9. According to MaiCapital's official website, MaiCapital launched the "Blockchain Opportunity Fund" in March 2019. It is a hedge fund focused on cryptocurrencies and meets the requirements of the Hong Kong Securities Regulatory Commission for 12 months of audit records. In May 2020, MaiCapital launched the "Bitcoin + Investment Fund", focusing on quantitative analysis, tracking and outperforming Bitcoin's performance in various markets. MaiCapital is a member of the blockchain technology group MaiCoin Group, which has layouts in exchanges and blockchain technology solutions. Arrano Capital, a subsidiary of EBO Capital, launched a Bitcoin tracking fund in April 2020, planning to raise $100 million within a year. Huobi, as mentioned above, has just announced that it has obtained licenses No. 4 and No. 9.

Singapore

Public opinion believes that DBS Bank's crypto trading platform has fired the first shot for Singapore to officially enter the cryptocurrency industry. But in fact, as early as 2018, Swiss Asia Financial Services Company had launched a cryptocurrency hedge fund in Singapore - Kryptos Alpha, claiming to be Singapore's first crypto fund. Kryptos Alpha arbitrages between different exchanges and cryptocurrencies, and also participates in potential ICO projects to pursue absolute returns. Fund manager Zhang Sheng Quan said in an interview in 2018 that the fund's funds come from high-net-worth individuals and intends to introduce family office investors.

Singapore's Three Arrows Capital is also a well-known cryptocurrency hedge fund, holding more than 6% of Grayscale's GBTC shares, and has set up a special fund, DeFiance Capital, which has invested in Bitcoin, Ethereum, Polkadot, and a large number of DeFi projects at the base layer. Three Arrows Capital has registered as a fund management company with the Monetary Authority of Singapore. However, how to invest through Three Arrows Capital's digital currency portfolio and whether interested investors face investment thresholds have yet to be clarified.

The Monetary Authority of Singapore has not made special regulations for fund companies that specialize in investing in cryptocurrencies, but has focused more on the supervision of digital payment currency service providers. Recently, the Singapore Parliament passed the Payment Services Act Amendment Bill, which expanded the scope of cryptocurrency supervision.

It can be seen that most of the funds focusing on crypto asset investment in the Asia-Pacific region are hedge funds and quantitative funds, with high investment thresholds and many restrictions. No trust funds similar to Grayscale have been found so far. So do they have the potential to become or develop an Asia-Pacific version of "Grayscale"?

Putting aside the "professional investor" curse of the Hong Kong Securities and Futures Commission, Hong Kong's financial infrastructure is relatively complete, with fund and trust regulations in place, and the real estate trust investment products promoted by the Hong Kong Stock Exchange also provide a good paradigm. There is a certain possibility and feasibility to cultivate an Asia-Pacific version of "Grayscale" in Hong Kong. Singapore's current supervision is relatively loose, but there is also a certain risk of policy clarity. Whether relevant measures will be introduced in the future remains to be seen.

in conclusion:

1. There are still some uncertainties in the cryptocurrency policies in Hong Kong and Singapore, which cannot be compared with the United States. Therefore, large-scale funds similar to Grayscale will not appear in the short term.

2. The cryptocurrency ecosystem in Hong Kong and Singapore cannot be compared with that in the United States, and lacks a "giant" like DCG that can support a huge system like Grayscale, which includes Genesis, Coinbase, CME and other ecological components. Only in a relatively mature ecosystem can a complex arbitrage derivative system like Grayscale be formed.

3. Whether Grayscale will appear in Hong Kong and Singapore in the future depends on the increasing certainty of cryptocurrency policies and the development and maturity of the cryptocurrency markets in the two places, especially the recognition of high-net-worth individuals and institutions in the two places for the allocation of cryptocurrency. This future is not far away. As the builder of the largest cryptocurrency ecosystem in Asia, Huobi’s entry at this time may accelerate this process.

4. The launch of Bitcoin and Ethereum fund products will attract more traditional funds, thereby boosting the prices of mainstream projects. (Picture from chepicap)