Hong Kong is poised to launch Asia's first spot crypto ETFs. The city-state is a major global financial hub and has one of the world's most active and liquid securities markets. Is this Asia's chance to become a key player in the global cryptocurrency market?
The financial services sector is one of Hong Kong's most important pillars, accounting for more than one-fifth of the city's GDP. The world's top 100 banks are based in Hong Kong. Financial institutions are attracted by Hong Kong's zero-tax policy on capital gains and dividends. Hong Kong hosts the largest pool of renminbi (RMB), China's currency is among the world's most traded currencies, liquidity outside mainland China. The country serves as a springboard for foreign companies seeking access to mainland China.
Hong Kong Bitcoin and Ethereum ETF approval
Yesterday, April 15, 2024, several Hong Kong investment firms announced that they had received approval from the Securities and Futures Commission (SFC) to list spot Bitcoin and ether ETFs. This news comes just three months after the launch of US spot BTC ETFs, which are currently holding close to 60 billion USD. Among the approved issuers are China Asset Management (AMC, based in Hong Kong), Bosera and Harvest. However, these announcements seem to have pre-empted an official statement from the SFC, which has yet to confirm the approvals or release a list of authorized issuers.
Unlike its neighbor China, which has cracked down on cryptocurrencies and banned Bitcoin mining, Hong Kong is crypto-friendly. In June 2023, Hong Kong officially launched its crypto licensing regime for crypto trading platforms, allowing licensed exchanges to offer retail trading services. So far, the license has been granted to the companies HashKey Exchange and OSL. Just one year later, Hong Kong appears to be on the verge of launching its first spot Bitcoin and Ethereum ETFs, with OSL playing a key role as a trading and custodial partner. Interestingly enough, Hong Kong will have a spot-based ETF on Ether (ETH) before the United States do.
Impact of a Hong Kong crypto ETF
Analysts believe that Hong Kong's move towards a spot BTC and ETH ETF could trigger a domino effect. Causing other jurisdictions like Australia, Japan, Korea and the UK to follow suit. This could significantly increase institutional investment in Bitcoin and further legitimize cryptocurrencies within the mainstream market. However, due to China's cryptocurrency ban, the crypto ETFs are unlikely to be available for Chinese investors. Hong Kong issuers have confirmed these regulatory barriers, preventing Chinese funds from investing in crypto ETFs.
A report by quantitative crypto and TradFi trading firm Presto explains how the HK crypto ETFs have a long-term impact on China's crypto policy. It is likely that China sees the development in Hong Kong as a kind of sandbox for testing new financial models, similar to how Macau represents China's gaming and leisure industry. How the market responds to the ETFs can be a measuring stick for the immense growth drivers of the Hong Kong and Chinese crypto industries. Potentially having a positive impact on the regulatory framework in the region. Presto conservatively estimates that the BTC Spot ETF alone will attract US$10-20 billion in the first 12 months of listing.
Eric Balchunas, senior ETF analyst for Bloomberg, voiced a much more conservative stance. He doesn't expect inflows to exceed $500 million. His reasoning is the small size of Hong Kong's ETF market of only $50 billion without official accessibility to Chinese residents. Also, the three approved issuers are not big fish like BlackRock, and the underlying ecosystem is less liquid and efficient than competing markets. Another factor to consider are the fees of 1-2%, much higher than in the US. The takeaway is that other countries adding BTC ETFs is undoubtedly positive for the crypto ecosystem, but a small contribution compared to the mighty US market.
Latest on HK spot Bitcoin ETFs: They have been approved to exist but not launch (yet). Rumor has it launching next wk so to not compete w Dubai conf. Don't expect a lot of flows (I saw one estimate of $25b that's insane). We think they'll be lucky to get $500m. Here's why:
1. HK…— Eric Balchunas (@EricBalchunas) April 15, 2024