Hong Kong will launch its first spot bitcoin and ether exchange-traded funds (ETFs) on April 30, cementing the city’s role as a virtual-asset hub, in contrast to mainland China’s crackdown on cryptocurrencies.
Hong Kong’s Securities and Futures Commission (SFC) has approved both retail and institutional investors directly investing in bitcoin and ether, the world’s two largest cryptocurrency tokens, making the city the envy of the underground crypto investor community on the mainland where bitcoin trading and mining activities are banned.
The first batch of approved Hong Kong-based ETFs are managed by Chinese fund managers Harvest International and China Asset Management, with a jointly managed product offered by Mainland Chinese Bosera Asset Management and Hong Kong virtual asset firm HashKey Capital.
Hong Kong’s spot crypto ETFs have one big attraction: no tax
“With the growing adoption of ETFs in institutional asset allocation and retail trading in Hong Kong, we expect robust demand for our offerings,” said Thomas Zhu, head of digital assets and Family Office Business at China Asset Management.
The SFC’s nod to spot bitcoin and ether ETFs makes Hong Kong the first jurisdiction in Asia to approve such products, and it comes after the US Securities and Exchange Commission in January approved spot bitcoin ETFs.
There has been more than US$200 billion in trading volume for the three-month-old US bitcoin ETFs, according to The Block, a crypto news and data outlet.
Unlike US bitcoin ETFs that can only be purchased with dollars, Hong Kong allows in-kind creation models, which enable direct exchange of cryptocurrencies for ETF shares.
“The in-kind subscription and redemption mechanism increase the flexibility and inclusiveness of virtual asset spot ETFs, and it has certain arbitrage space, which is favourable to not only crypto-native investors but also traditional financial investors,” said Jason Jiang, senior researcher at OKG Research.
However, Jiang warned that in-kind creation models will increase investment risks due to the complexity of the process involving bitcoin and ether ETFs exchange, custody and conversions. But he added that “Hong Kong has established a relatively comprehensive regulatory system” that is capable of dealing with relative risks.
The SFC’s approval of spot Ethereum ether ETFs have “put Hong Kong ahead of the US and other regions”, giving it “first-mover advantage”, said Tony Tong, the co-chairman of Hong Kong Blockchain Association.
“I believe this could attract the larger group of traditional stock investors in Hong Kong and Asia to enter the crypto investment starting with spot bitcoin and Ethereum ETFs,” said Tong.
Mainland Chinese investors will likely be unable to participate due to Beijing’s restrictions on crypto trading. A survey by New York-based blockchain research firm Chainalysis said last month that Chinese cryptocurrency profits totalled US$1.15 billion in 2023, ranking fourth behind the US, UK and Vietnam.
Hong Kong is also working on a framework for stablecoins, a type of token that is pegged 1-1 to fiat currency and typically backed by reserves of cash and bonds.
