Following the approval of the Bitcoin spot ETF in the United States, Hong Kong has also made a significant move.
On April 15, Huaxia Fund (Hong Kong), Bosera Fund (International) Limited, and CSOP Asset Management announced that they have obtained conditional approval from the Securities and Futures Commission (SFC) of Hong Kong to issue Bitcoin and Ethereum spot ETFs. This marks Hong Kong as the second jurisdiction in the world to approve such products, following the United States.
Compared to the cautious approach of the United States, Hong Kong's virtual asset spot ETFs are evidently more open. Not only have they included the still-discussed Ethereum spot ETF, gaining a first-mover advantage, but their ETF mechanism design is also more accommodating than that of the United States.
However, in terms of cryptocurrency influence, Hong Kong does not hold an advantage in the Western world, and even in the past year, despite frequent policy announcements, there has been little discussion, giving a sense of stagnation. Will the listing of this ETF change this situation?
Regardless, with the listing of the ETF, Hong Kong's cryptocurrency market is once again setting sail.
On April 15, Huaxia Fund (Hong Kong), Bosera Fund (International) Limited, and CSOP Asset Management successively announced on their official accounts that they have obtained conditional approval from the SFC to issue Bitcoin and Ethereum spot ETFs. Among them, Huaxia Fund (Hong Kong) has partnered with OSL, and the custodian is CMB International UK BOC Credit Suisse Trust Co., Ltd. CSOP Asset Management has also chosen OSL as its first virtual asset trading platform and custodian partner, while Bosera International has collaborated with HashKey Capital for joint issuance and management.
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 at a critical period for ETF applications, the SFC of Hong Kong issued a "Circular on the Distribution of Fund Investments in Virtual Assets," indicating its readiness to accept applications for virtual asset spot ETFs. Subsequently, more than 20 related institutions began to enter the spot ETF market, with CSOP Asset Management, Bosera, Huaxia Fund, and Victory Securities being typical representatives. Taking CSOP Asset Management, the first applicant for the Bitcoin spot ETF, as an example, it announced on January 26 that it had become an applicant for the Bitcoin spot ETF.
On April 10, Reuters reported that a Bitcoin spot ETF may be launched in Hong Kong this month, and the first list of names may be announced as early as next week. At the same time, Tencent Finance's "First Line" once again reported that the SFC of Hong Kong plans to announce the first four Bitcoin spot ETFs in Hong Kong to the public on April 15, including CSOP Asset Management, Huaxia Fund, Bosera Fund, and Wisdom Financial. The entire Bitcoin spot ETF project had detailed communication and planning with the Hong Kong Stock Exchange early on, and it is expected to be completed in about 10 days. The SFC originally planned to list the Bitcoin spot ETF in Hong Kong around April 25, at the latest by the end of April.
According to the official website of the SFC of Hong Kong, there are currently 18 institutions on the list of virtual asset management funds in Hong Kong. Among them, Huaxia Fund and CSOP Asset Management have obtained the SFC's approval for virtual asset license No. 9, allowing them to manage portfolios that are 100% invested in virtual assets independently. Bosera Fund and Wisdom Financial, on the other hand, have not yet obtained a licensed responsible person, 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 the release of new regulations in June last year, the cryptocurrency market in Hong Kong has developed rapidly but with an unstable foundation due to restrictions on capital channels and market capacity. Subsequently, multiple fraud incidents led to a collapse in public awareness, and there were even proposals to regulate OTC trading. After the licensed exchange application process concluded this year, market discussions continued to decrease, and its influence was far from that of the absolute leader, the United States. Regional areas such as Singapore and Dubai also continued to eat into its market share.
It wasn't until Web3 Week that Hong Kong was pushed into the spotlight again. According to the regulatory authorities in Hong Kong, more than 220 Web3.0-related companies from mainland China, Europe, and more than 20 other regions have set up offices in Hong Kong. However, in reality, due to space and cost limitations, despite the increase in offices, most companies only use them as operational or technical branches, with few employees stationed there, and few headquarters.
In this context, for Hong Kong, the approval of the ETF directly broadens investment channels, reduces regulatory resistance, and further encourages traditional investors to migrate to the cryptocurrency field, providing new vitality for its Web3 industry. It also enhances Hong Kong's open image in the cryptocurrency market and strengthens its competitiveness in virtual assets. As for why it was approved at this time, it is both to gain a first-mover advantage under a stable regulatory framework, as the licensed application process is still ongoing, and other frameworks are gradually catching up. It also follows the initial trial in the United States, which has cleared certain regulatory obstacles.
However, for the applying institutions, the ETF application represents more direct benefits. Taking the example of the Bitcoin ETF in the United States, as of April 15, according to SoSoValue data, the total net asset value of the Bitcoin spot ETF was $56.22 billion, with an ETF net asset ratio (market value as a percentage of total Bitcoin market value) of 4.26%, and a cumulative net inflow of $12.53 billion.
Such a large amount of assets naturally brings significant profits to the issuers and will also attract other fund issuers. According to CoinDesk, Matrixport predicted in a report that a Bitcoin ETF listed in Hong Kong could unleash demand of up to $25 billion. The report believes that with mainland investors using the Southbound Trading Scheme, if a Bitcoin spot ETF listed in Hong Kong is approved, up to $25 billion in funds could flow in from mainland China. However, according to current regulations, it is still very difficult for mainland participants to participate, as they not only face restrictions on foreign exchange funds but also have to deal with KYC issues when opening bank accounts and exchange accounts.
Returning to this application, in terms of mechanisms, Hong Kong is undoubtedly more advanced than the United States.
The U.S. authorities do not allow physical purchases in ETFs and only use cash purchases. In the cash mode, the ETF's creation and redemption process involves cash, and the issuer purchases BTC physically with cash, adding a cash custodian in between to reduce the number of intermediary institutions handling actual Bitcoin, creating a relatively closed system that makes it easier to track each transaction by market makers, reduces anti-money laundering issues, and eliminates the risk of financial institutions such as banks actually participating. It can be seen that this approach is more in line with traditional securities trading methods and shows the regulatory concerns and hesitations of the U.S. authorities regarding this product.
In contrast, physical purchases in Hong Kong are accepted. According to Foresight, the two virtual asset spot ETFs jointly issued and managed by HashKey Capital and Bosera Fund (International) Limited will adopt a physical purchase mechanism, allowing investors to directly subscribe to ETF units using Bitcoin and Ethereum.
From the perspective of stakeholders, in addition to the direct issuers, custodians have also become the coveted ones. Currently, the only two trading platforms that have obtained virtual asset licenses No. 1 and No. 7 from the SFC in Hong Kong are OSL and Hashkey. Although both of them have faced a situation where they are more talked about than used due to high licensing costs, limited currency listings, and low offshore competitiveness, they will both see new economic growth points under the promotion of the ETF, and custodial fees and trading fees are expected to break through.
However, in terms of the difference in market size, custodial scale is still difficult to avoid being restricted. Taking Hashkey as an example, its custodial business has been operating steadily for over a year, with custodial assets exceeding 2.2 billion yuan, while as of the fourth quarter of 2023, Coinbase's year-end custodial assets were $101 billion, without taking into account the current spot ETF scale. It is worth emphasizing that Coinbase custodies 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 to spot ETFs, futures ETFs are subject to restrictions on contract rollovers and trading fees. Although in the recent trend of rising Bitcoin, the net value and profit effect of futures ETFs have improved, it is clear that their liquidity and price tracking are difficult to match spot ETFs, and there is likely to be a subsequent outflow of funds. In order to attract traffic, during a recent conference, the issuer of the futures ETF, Southern Dongying, put a large number of bus advertisements in Hong Kong, stating that Bitcoin had risen by 45% in the first two months of 2024, attracting global attention and demand exceeding supply.
From the perspective of the development of the cryptocurrency industry in Hong Kong, an interesting comparison is that as of April 15, Coinbase has listed 246 cryptocurrencies, and the world's largest cryptocurrency exchange Binance has listed 390 cryptocurrencies, but HashKey Exchange, a leading exchange in Hong Kong, has only listed 21 cryptocurrencies.
Despite appearing to be in a difficult position, from an optimistic perspective, this also represents the vast potential of the cryptocurrency industry in Hong Kong. Adam Zhou, co-founder of the Hong Kong cryptocurrency company VDX, once stated in an interview, "There will definitely be a unicorn in the Hong Kong cryptocurrency industry."
This is not an empty claim. Compared to the current cryptocurrency ecosystem in the United States, the local compliant exchange Coinbase has an absolute advantage, with a market value of $59.3 billion. The offshore exchange Binance leads globally, and on the brokerage channel side, Robinhood has shown significant growth, with cryptocurrency revenue consistently higher than stock trading revenue. However, in Hong Kong, whether in terms of local exchanges or brokerages, it is still in the early stages. Theoretically, the listing of more cryptocurrencies and the inflow of more funds are only a matter of time. Under the influence of RWA, stablecoins, and ETFs, more forms of listing will emerge, and it may even give rise to a new type of large-scale digital asset exchange, potentially representing a market worth tens of billions of dollars.
Perhaps this is also the reason why the Hong Kong government firmly supports the layout of virtual assets, with more than 20 institutions rushing to enter the market and more than 60 brokerages entering the competition. The trend has arrived, and the pioneers may be the first to eat the crab.
However, the market's response to this news has been muted, with no significant impact on the overall market. Bitcoin is currently trading at $66,244, up 3.19% in the past 24 hours. However, the concept sector has seen a significant rise, with the Hong Kong concept coins rising by 10.6% in the past 24 hours.
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