Hong Kong Virtual Asset Spot ETF

On April 30, a total of 6 virtual asset spot ETFs under Bosera HashKey, Huaxia, and Jia Shi were officially listed on the Hong Kong Stock Exchange and opened for trading. These include Bosera HashKey Bitcoin ETF (3008.HK), Bosera HashKey Ethereum ETF (3009.HK), Huaxia Bitcoin ETF (3042.HK), Huaxia Ethereum ETF (3046.HK), Jia Shi Bitcoin Spot ETF (3439.HK), and Jia Shi Ethereum Spot ETF (3179.HK).

Li Yimei, CEO of Huaxia Fund, stated in an interview with Bloomberg TV that the launch of Bitcoin and Ethereum ETFs in Hong Kong "has opened the door for many RMB holders to seek alternative investments. With the development of openness, it is hoped that mainland Chinese investors will have new opportunities to participate in this process in the future." (Note: Currently, the ETFs launched in HK are only applicable to Hong Kong residents.)

However, from a data perspective, the first-day trading situation of virtual asset spot ETFs in Hong Kong was less than satisfactory, with a total trading volume of 87.58 million Hong Kong dollars (12 million US dollars) for the 6 Bitcoin + Ethereum spot ETFs. In comparison, the first-day trading volume of the US Bitcoin ETF was 4.6 billion US dollars. Despite the less than ideal first-day trading data, it still opened the door for alternative assets for Hong Kong investors, and the market is expected to increasingly accept such financial products. Some industry insiders believe that due to the poor performance of the Chinese stock market and the continued volatility of the real estate market, in the medium to long term, high-net-worth individuals in China may invest in Hong Kong's crypto asset ETFs through various channels.

Prospects of US ETH Spot ETF

Recently, asset management company Franklin Templeton listed its Ethereum spot ETF on the website of the Depository Trust & Clearing Corporation (DTCC) in the United States, labeled as EZET. Theoretically, including this ETF on the DTCC website represents the first step in the trading process. However, this does not guarantee approval from the SEC, which will ultimately decide whether the ETF can be launched.

The DTCC website typically displays securities that meet trading and settlement requirements, including ETFs that meet specific registration or compliance requirements. Although this list does not directly impact the SEC's decision, it does help adjust ETFs to meet market demand, thereby helping to keep the market price and net asset value (NAV) of the ETF close.

In February of this year, Franklin Templeton, like BlackRock, Grayscale, VanEck, and Ark Invest, submitted an application for an Ethereum spot ETF to the SEC. However, the SEC recently delayed the decision on Franklin Templeton's ETF application, citing the need to review proposed rule changes for listing and trading shares on the CBOE BZX Exchange. The SEC has an additional 45 days, until June 11, for further evaluation.

Compared to Bitcoin ETFs, the prospects for Ethereum ETFs are not as optimistic. Bloomberg ETF analyst Eric Balchunas estimates the likelihood of the SEC approving an Ethereum ETF in May to be around 35%. He believes that compared to the Bitcoin ETF application process, the SEC has taken a less active stance, indicating that this is a strategic move rather than just a delay. In addition, SEC Chairman Gary Gensler's increased stance on the possibility of ETH being classified as a security has added complexity to the decision-making process.

JPMorgan analysts expect regulatory approval for Ethereum spot ETFs to continue to be delayed, and this approval may ultimately lead to legal action, similar to Grayscale's lawsuit, prompting the SEC to reconsider the application for a Bitcoin spot ETF.

The approval of ETH futures ETFs by the SEC has long been used as an argument for approving ETH spot ETF applications. Grayscale believes that SEC-approved Bitcoin futures ETFs carry the same risks as Bitcoin spot ETFs, so this argument was strengthened after Grayscale won a legal battle against the SEC in August 2023. Van Buren Capital believes that the SEC may approve an Ethereum spot ETF to avoid another defeat in court, but is more likely to be willing to take another gamble in court.

Despite the challenges, US investors and companies are still striving for the approval of Ethereum spot ETFs, as establishing connections between cryptocurrencies and traditional financial products is considered a significant step forward. It is currently unclear what action the SEC will take, but if the Ethereum spot ETF is approved, US regulators will take a more progressive stance on cryptocurrencies.

Will ETH be Classified as a Security?

Fox Business recently reported that according to court documents filed by Ethereum software giant ConsenSys, SEC Chairman Gary Gensler has been attempting to classify Ethereum as an unregistered security that does not comply with current federal regulations for at least a year. ConsenSys is challenging the SEC's attempt to reclassify Ethereum as a security through litigation.

According to the documents, on March 28, 2023, Gurbir Grewal, head of the SEC's enforcement division, approved a formal investigation order for "ETH 2.0," authorizing SEC staff to investigate and subpoena individuals involved in ETH transactions.

The FOX report pointed out that the SEC is determined to keep the investigation confidential, and individuals who received subpoenas claimed to have been forced to sign nondisclosure agreements. As one of the companies that received an SEC subpoena, ConsenSys filed a lawsuit against the SEC last week, revealing that it also received a "Wells Notice" from the SEC earlier this month, possibly related to potential enforcement actions involving its MetaMask Swaps and staking services.

(Note: A "Wells Notice" refers to an informal notification issued by the SEC to publicly traded companies before civil litigation, allowing the notified company to communicate and negotiate with the SEC before receiving formal litigation.)

Historically, SEC Chairman Gensler has not taken a clear stance on whether ETH is considered a security. In April 2023, Congressman Patrick McHenry asked him whether ETH is a security during a congressional hearing, to which Gensler refused to answer the question, attempting to conceal the SEC's preliminary determination to classify ETH as a security.

On April 30, House Financial Services Committee Chairman Patrick McHenry commented on the escalating dispute between the SEC and the cryptocurrency industry, accusing SEC Chairman Gary Gensler of "intentionally misleading Congress, and new court documents show this was an intentional attempt to distort the SEC's position." He pointed out that there is a clear disconnect between the SEC's public statements and its private actions regarding ETH, and that this enforcement approach towards digital assets reflects the arbitrary and capricious nature of SEC regulation.

As of 2018, the SEC's position on Ethereum was relatively clear: Ethereum is not a security. At least, this was the stance expressed by Bill Hinman, the SEC's director of corporation finance at the time, and then-SEC Chairman Jay Clayton in their speeches. However, after the current SEC Chairman Gary Gensler took office, there has been a subtle change in the agency's position on Ethereum. Shortly after Ethereum transitioned to a PoS consensus mechanism in 2022, Gensler stated that in PoS blockchains, users lock their tokens to ensure network security and receive token rewards, which constitutes an investment contract and could be classified as a security, but he did not specifically mention ETH.

Under Gensler's leadership, the SEC has taken enforcement actions against several cryptocurrency exchanges, including Coinbase, Kraken, and Binance, on the grounds that these exchanges sold unregistered securities such as Cardano's ADA and Solana's SOL to US customers. However, in any previous SEC litigation, Ethereum has never been directly classified as a security.

Consensys believes this is a deliberate "power grab" by the SEC. Consensys is challenging the SEC's actions on two fronts: first, insisting that Ethereum does not meet the definition of a security and is therefore not subject to such regulations, and second, accusing the SEC of unfairly targeting its MetaMask product.

The SEC has chosen not to comment on these ongoing legal proceedings. Ebunker believes that the case reflects the uncertain regulatory environment for cryptocurrencies in the United States and may affect the future classification of Ethereum. Many industry insiders believe that the SEC's current attempt to classify ETH as a security is a strategic move aimed at gaining regulatory authority over ETH and other tokens suspected of being securities. As the second-largest blockchain by market capitalization and the platform for most mainstream DeFi, DAO, and NFT projects, reclassifying ETH as a security would undoubtedly have a significant impact on the entire cryptocurrency industry.

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