Why Hong Kong Crypto ETFs Matter

While the Middle East and Europe have made headlines for fostering favorable crypto ecosystems and putting regulatory frameworks in place, Hong Kong has quietly taken action.

Over the past 12 months, Hong Kong has pushed forward a series of regulatory announcements in an effort to develop a tightly regulated home for the digital assets sector. From implementing a licensing regime for virtual asset trading platforms to working on a framework for fiat currency-referenced stablecoins.

But it’s Hong Kong’s launch of crypto exchange-traded funds (ETFs) and the speed of the regulator’s approval that has people talking.

In December 2023, the Hong Kong Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) issued a joint statement detailing the requirements that must be met for the regulator to approve ETFs with more of 10% participations. crypto holdings. Within four months of this circular, Hong Kong spot crypto investment products were given the green light.

Not only is this a positive signal of market maturity in Hong Kong, but it demonstrates that the regulator is working with the industry to support demand and put in place safeguards to protect investors.

But it also has wider implications beyond Hong Kong’s borders. The approval of spot crypto ETFs could accelerate the acceptance of these products in other Asian financial centers.

Hong Kong has certainly cemented its position as an innovative financial center and could even inspire China to embrace crypto.

Crypto ETF debut in Hong Kong – an attraction for Asian investors

On April 30, following the SFC’s approval, several mainland Chinese fund companies and local virtual asset companies officially launched ETFs for Bitcoin and Ethereum.

As the first financial center in Asia to authorize this investment product, Hong Kong will benefit from first-mover advantage; able to meet the needs of Asia-based investors seeking exposure to Bitcoin ETF funds in their time zone.

Hong Kong is a leading financial center and a gateway for Chinese investment. The city’s embrace of crypto could unlock billions in potential demand, especially with Southbound Stock Connect, which allows mainland Chinese investors to buy shares on the Hong Kong Stock Exchange.

Although, at this time, these ETFs will not be included in the Southbound Stock Connect program (and there are various minimum requirements before they can be included), China’s recent interest in alternative assets, such as ‘or, suggests a potential appetite for bitcoin exposure.

If Hong Kong’s ETF access program for Chinese investors were to expand its scope to crypto ETFs, it could trigger a wave of liquidity given that crypto trading is banned on the mainland.

Drawing comparisons

The in-kind creation model of these ETFs, unlike the cash-settlement model in the United States, could attract interest from crypto natives, market makers, and digital asset exchanges. By allowing investors to contribute bitcoins, instead of cash, directly to the ETF, investors can benefit from greater efficiency and arbitrage opportunities.

However, despite the growth potential of Hong Kong Bitcoin ETFs, the overall market size is small compared to that of the United States, which has the deepest ETF market in the world, led by heavyweights like Blackrock and Fidelity. Analysts have pointed out the big difference in size between Hong Kong’s ETF market, estimated at $50 billion, and the US market, which is a staggering $9 trillion.

Although the market is nascent, there is significant growth potential. Hong Kong Bitcoin and Ethereum funds could raise $1 billion over two years, according to Bloomberg ETF analyst Rebecca Sin. This indicates that Spot ETFs should, and must, attract more demand than Futures ETFs. Currently, Hong Kong’s total assets for futures ETFs reach around US$164 million, compared to US$2.3 billion in the United States. This disparity highlights the challenge and opportunity for Hong Kong to expand its market presence.

It will be interesting to see if, as with US Bitcoin ETFs, the news regarding net new flows will act as a driver of market sentiment. This could influence the adoption and success of these new financial products.

Regardless, the SFC’s approval of crypto ETFs not only validates the legitimacy of Bitcoin, but has the potential to make Hong Kong Asia’s leading digital asset hub – a title that has been under threat over the last two or three years. This bold statement from regulators positions the city as a leader in the digital asset race and is an important milestone for Hong Kong.

Asian Ripple Effect

Hong Kong’s green light for these ETFs could catalyze their acceptance across Asia. South Korea, Japan, and Singapore already have high crypto adoption rates.

South Korea’s recent political shift toward a pro-Bitcoin stance strengthens the possibility of a one-time ETF approval this year. The winning party would have campaigned to prioritize investor access to these products.

Japan and Singapore are hot on their heels

In Japan, the government’s Pension Investment Fund is exploring investments in “illiquid assets” like bitcoin. Additionally, the Japanese government recently proposed allowing investment partnerships to hold crypto assets.

Singaporeans also seem to have a good appetite. A recent survey showed that a third of citizens are interested in overseas spot Bitcoin ETFs. Although the Monetary Authority of Singapore has reservations about retail access, crypto adoption is on the rise and integrating into mainstream commerce.

With Hong Kong in the lead, other Asian countries could accelerate their ETF discussions.

Cautious optimism

Hong Kong’s official approval of Bitcoin and Ethereum ETFs has significance beyond regional convenience. This is a global milestone for digital assets, providing investors with a new regulated pathway to access cryptocurrencies. The ETF launch also comes at an important time for the crypto market, with Bitcoin testing its previous cycle closing monthly high after the halving, and Ethereum facing increasing competition in the layer 1 space .

Building a virtual asset ETF infrastructure takes time. But once matured, Hong Kong’s ETF ecosystem will enable the participation of a wider range of investors, leading to increased investment flows and more competitive pricing. This, in addition to catalyzing the evolution of regulatory frameworks supporting crypto ETFs in other regions.

Recent policy announcements from the SFC and HKMA have reignited the race to become the region’s leading digital asset hub. Encouraged by the four-fold increase in the price of bitcoin, the launch of a crypto ETF in Hong Kong puts the city back in the driver’s seat and fosters a climate of cautious optimism in its crypto space.

Alessio Quaglini is the CEO and co-founder of Hex Trust, a fully licensed digital asset custodian.

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