Forward the Original Title: Xiaosa Team | Major Impact! Three Hong Kong Bitcoin/Ethereum ETFs Approved, What Does It Mean for Investors?

On April 15, 2024, three fund companies successively announced via social media their approval to issue ETF financial products investing in spot Bitcoin and spot Ethereum. The news immediately triggered reactions in the global capital markets. As the leader in cryptocurrency financial capital operations in Asia, Hong Kong, with its strength, has fueled the cryptocurrency bull market.

Today, the Xiaosa team will analyze the significance of the approval of Bitcoin and Ethereum spot ETFs in Hong Kong for investors, explaining Hong Kong’s cryptocurrency policies, and helping everyone make more rational judgments.

1. Background of Approval for Hong Kong Bitcoin/Ethereum ETFs

Not long ago, the U.S. Securities and Exchange Commission approved over a dozen Bitcoin spot ETFs in one fell swoop, marking a milestone event in the cryptocurrency asset market. Now, as a pioneer in cryptocurrency assets in the Asian region, Hong Kong has also approved the issuance of cryptocurrency ETF products (including Bitcoin and Ethereum), providing investors with more choices and opportunities for further integration between traditional capital markets and the cryptocurrency world.

For Hong Kong residents, Hong Kong Bitcoin/Ethereum ETFs mean that residents can directly purchase spot Bitcoin and Ethereum using securities accounts without opening accounts on cryptocurrency exchanges.

1) Disclosure of Clear Information on the Issuance of Cryptocurrency Spot ETFs in Hong Kong

The Hong Kong Securities and Futures Commission (SFC) provided clear information about cryptocurrency ETFs half a year ago. On December 22, 2023, the SFC issued the “Circular on the Authorization of Fund Investment in Virtual Assets by the Securities and Futures Commission of Hong Kong” and the “Joint Circular on Intermediaries’ Virtual Asset-Related Activities”. In these two circulars, the SFC stipulated regulations related to the issuance and management of public funds products with virtual asset proportions exceeding 10%. Additionally, requirements were outlined regarding subscription, redemption, custody, valuation, and other aspects of cryptocurrency assets. The “Circular on the Authorization of Fund Investment in Virtual Assets by the Securities and Futures Commission of Hong Kong” also specifically pointed out that Hong Kong may approve spot ETFs of mainstream cryptocurrencies such as Bitcoin and Ethereum. Users will have the option to subscribe to and redeem them using cash or cryptocurrency.

Therefore, for those familiar with the regulatory direction of cryptocurrency assets in Hong Kong, the approval of Bitcoin and Ethereum spot ETFs in Hong Kong is not surprising. Regarding the selection of cryptocurrency exchanges, according to publicly available information, among the approved funds, two have chosen OSL, while another has opted to collaborate with HashKey. It can be seen that OSL and HashKey, as licensed cryptocurrency trading platforms that allow retail clients to trade, have begun to demonstrate significant advantages. It is worth mentioning that HashKey’s cryptocurrency investment institution, HashKey Capital Limited (referred to as “HashKey Capital”), recently obtained an upgrade to the SFC’s Type 9 license and has obtained exemptions for professional investors, allowing it to provide services to a wider range of users.

2) What are the Differences Between Cryptocurrency Spot ETFs in Hong Kong and the United States?

The Xiaosa team believes that the difference between Hong Kong’s cryptocurrency spot ETFs and those in the United States mainly lies in two points:

(1) Different Underlying Assets

The range of cryptocurrency ETFs approved by the Securities and Futures Commission (SFC) in Hong Kong is larger than that in the United States. It includes both Bitcoin spot ETF trading and Ethereum spot ETF trading. Among over ten cryptocurrency spot ETFs approved by the United States in January 2024, only Bitcoin, a single cryptocurrency asset, is included. There is currently no news about the approval of other cryptocurrency ETFs. In previous analysis articles, the Xiaosa team explained that U.S. regulatory agencies have always maintained a cautious attitude towards cryptocurrency assets.

The Xiaosa team believes that approving both Bitcoin and Ethereum ETFs is a significant leap forward for Hong Kong regulatory authorities. Moreover, it is a pioneering initiative and a major encouragement to the Web3 industry and the cryptocurrency world.

(2) Different Subscription and Redemption Methods

In terms of subscription and redemption methods, ETFs in Hong Kong not only allow cash subscription and redemption but also allow direct subscription and redemption using cryptocurrency, meaning that SEF assets can be directly purchased using Bitcoin or Ethereum. Compared with ETFs in the United States, this move is closer to attributes of “Web3.” However, the Xiaosa team reminds us that, in terms of specific operations, using cryptocurrency for subscription and redemption of ETF products will inevitably be subject to stricter regulations, especially for bulk cryptocurrency subscription and redemption actions, which require compliance with the strict KYC of Hong Kong financial institutions.

2. What Does Hong Kong Crypto Asset ETF Mean for Investors?

The Xiaosa team mainly introduces the advantages and disadvantages of Hong Kong cryptocurrency ETFs.

(1) Advantages of Hong Kong Cryptocurrency ETFs:

Low investment technical threshold. Hong Kong cryptocurrency spot ETFs can be traded directly on the Hong Kong Stock Exchange like trading traditional securities, without the need for complex registration and KYC on major cryptocurrency trading platforms in Hong Kong. This significantly reduces the technical threshold for cryptocurrency trading. Moreover, traditional stock exchanges generally have higher liquidity than most existing cryptocurrency trading platforms due to their capital volume, and their regulatory measures are more complete.

2) Relatively higher security of cryptocurrency assets. Simply put, buying cryptocurrency spot ETFs does not require actual holding and storage of assets such as Bitcoin and Ethereum. Investors no longer need to worry about scenarios such as the loss of their stored cryptocurrency private keys (a situation that has occurred to a client served by the Xiaosa team due to improper storage).

3) Tax incentives. From a practical perspective, investing in cryptocurrency spot ETFs can also enjoy certain tax benefits under specific circumstances. Specifically, spot cryptocurrency assets has relatively certain legal nature of “securities”, but in other jurisdictions (especially those that have begun or are considering taxing cryptocurrency assets), there are cases where cryptocurrencies such as Bitcoin and Ethereum are considered “property”. In Hong Kong, where the direct purchase of spot cryptocurrency ETFs with cryptocurrencies is allowed, it is possible to avoid high property taxes by exchanging cryptocurrency for spot ETFs. In addition, assuming that the bull market for underlying cryptocurrency assets can last for a long time, investors may also enjoy low-tax incentives policies encouraged by various jurisdictions for long-term holding of securities.

(2) Disadvantages of Cryptocurrency Spot ETFs:

1) Cryptocurrency spot ETFs cannot avoid the investment risks inherent in cryptocurrency assets themselves. Investors need to understand that cryptocurrency spot ETFs are just an investment tool and cannot isolate the investment risks inherent in cryptocurrency assets themselves. Of course, cryptocurrency ETFs themselves are portfolios, and multiple investment targets can dilute the risk of cryptocurrency assets, but risks always exist.

2) Investment time difference. Cryptocurrency spot ETFs are not cryptocurrency assets themselves but are investment products that dynamically fluctuate based on tracking and anchoring the underlying cryptocurrency asset prices. Therefore, there is a risk of investment time difference. In other words, if cryptocurrency spot ETFs cannot timely anchor the prices of cryptocurrency assets, it is very likely that temporary decoupling between ETFs and cryptocurrency assets will occur, causing investors to miss investment opportunities in the cryptocurrency ecosystem where “a day in the crypto world is like a year in the real world.”

3 Conclusion

In summary, the approval of ETFs is a historically significant event for the cryptocurrency market in Hong Kong. It means that Hong Kong has effectively fulfilled its commitment to “embracing cryptocurrency assets” and has taken another step towards becoming a cryptocurrency financial center. For investors, ETFs reduce the technical threshold for Hong Kong investors to invest in cryptocurrency assets. This investment method, which is safer and offers greater tax incentives, also aligns more with the interests of relevant investors in the long run. For traditional capital markets, the advantages of cryptocurrency assets, as emerging investment products, are enough to attract some funds to favour them, especially in the current period when our country’s development is facing economic pressure.

As of now, funds can directly purchase cryptocurrency spot ETFs in Hong Kong, but due to legal regulations, mainland Chinese securities firms currently cannot directly access this product. Although there are no clear regulatory guidelines, according to Hong Kong’s consistent policies in the past, residents of mainland China may still not be able to purchase directly. Of course, the approval of this ETF is just the beginning of this milestone product, and we look forward to its future development in the future.

That’s all. Thank you, readers!

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