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Why Hong Kong’s crypto ETFs matter
Financial hub’s approval could boost acceptance across Asia, unlock billions in China
Alessio Quaglini 10 May 2024

While the Middle East and Europe have been grabbing headlines for fostering supportive crypto ecosystems and building out regulatory frameworks, Hong Kong has been quietly making its move.

Over the last 12 months, Hong Kong has pushed forward a raft of regulatory announcements in a bid to develop a tightly regulated home for the digital asset industry. From implementing a licensing regime for virtual asset trading platforms to working on a framework for fiat-referenced stablecoins.

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

In December 2023, the Hong Kong Securities and Futures Commission (SFC), alongside Hong Kong’s Monetary Authority (HKMA), released a joint statement in which they detailed the requirements that must be met for the regulator to approve ETFs with more than 10% of  holdings in crypto. Within four months of this circular, spot crypto investment products in Hong Kong received the greenlight.

Not only is this a positive signal of market maturity within Hong Kong, it’s evidence that the regulator is working with the industry to support demand and build the guardrails to protect investors.

But this also has broader implications beyond Hong Kong's borders. The approval of spot crypto ETFs could accelerate the acceptance of such products across Asia’s other financial centres.

Hong Kong has certainly cemented its position as an innovative financial centre and could even prompt an openness from China towards crypto.

Hong Kong’s crypto ETF debut - lure for Asian investors

On April 30, following the SFC’s approval, several mainland Chinese fund houses and local virtual asset firms officially launched ETFs for bitcoin and ethereum.

As the first financial centre in Asia to allow this investment product, Hong Kong will benefit from the first-mover advantage; able to cater for Asia-based investors who have been seeking exposure to bitcoin ETF funds in their time zone.

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

While, right now, these ETFs will not be included in the Southbound Stock Connect programme (and there are various minimum requirements before they can be included), China's recent interest in alternative assets, like gold, suggests a potential appetite for bitcoin exposure.

Should the programme for access to Hong Kong ETFs by Chinese investors widen the scope to include crypto ETFs, this could spark a wave of liquidity given crypto trading is banned on the mainland.

Drawing comparisons

The in-kind creation model for these ETFs, unlike the cash-settled model in the US, may spark the interest of crypto natives, market makers and digital-asset exchanges. By allowing investors to directly contribute bitcoin, instead of cash to the ETF, investors can benefit from greater efficiency and arbitrage opportunities.

However, despite the potential for growth in Hong Kong’s bitcoin ETFs, the overall market size is small relative to the US which has the deepest ETF market globally, commanded by heavy-weights like Blackrock and Fidelity. Analysts have pointed to the vast difference in size between Hong Kong’s US$50 billion ETF market and the US’ staggering US$9 trillion market.

While the market is nascent, there is significant growth potential. According to Bloomberg ETF analyst Rebecca Sin, Hong Kong’s bitcoin and ethereum funds may amass US$1 billion over two years. This indicates that Spot ETFs should, and need, to attract more demand than Futures ETFs did. Currently, Hong Kong’s total assets for futures ETFs have reached approximately US$164 million, versus US$2.3 billion in the US. This disparity underscores the challenge and the opportunity for Hong Kong to scale its market presence.

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

Regardless, the SFC's approval of crypto ETFs not only validates Bitcoin's legitimacy but has the potential to establish Hong Kong as Asia’s leading digital asset hub - a title that has been in jeopardy over the last two to three years. This bold statement from the regulators positions the city as a front-runner 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 demonstrate high crypto adoption rates.

South Korea's recent political shift towards a bitcoin-friendly stance strengthens the possibility of a spot ETF approval this year. The winning party were reported to have campaigned on prioritizing investor access to these products.

Japan, Singapore close behind

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

Singaporeans appear to have a healthy appetite too. A recent survey showed a third of citizens are interested in overseas spot bitcoin ETFs. While the Monetary Authority of Singapore has reservations about retail access, crypto adoption is on the rise, integrating into mainstream commerce.

With Hong Kong leading, other Asian nations may accelerate their ETF discussions.

Cautious optimism

Hong Kong’s official approval of bitcoin and ethereum ETFs holds significance beyond regional convenience. This is a global milestone for digital assets, offering a new regulated pathway for investors to access cryptocurrencies. The launch of the ETFs also comes at an important moment for the crypto market, with bitcoin testing its prior cycle monthly closing high post-halving, and ethereum facing increasing competition across the Layer 1 space.

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

The recent policy announcements from the SFC and HKMA have reignited the race to become the region’s leading digital asset hub. Spurred by bitcoin’s fourfold price jump, Hong Kong’s crypto ETF debut 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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