What does the approval of BTC and ETH spot ETFs in HK mean for the industry?

Repost the original title: What is the significance of the approval of Hong Kong BTC and ETH spot ETFs to the industry?

Hong Kong is one step ahead of the U.S. in adopting an Ethereum spot ETF.

On April 15, 2024, Harvest Global Investments, Hong Kong, announced that it had received in-principle approval from the Hong Kong Securities and Futures Commission (SFC) to launch two spot ETF products for digital assets (Bitcoin and Ethereum). These products will be offered through the first SFC-licensed and protected digital asset platform, OSL Digital Securities Limited, aiming to accurately reflect the real-time value of Bitcoin and effectively address the issues of excessive margin requirements and price premiums caused by a shortage of short selling.

On the same day, China Asset Management (Hong Kong) also announced that it had received approval from the SFC to plan to issue ETF products investing in Bitcoin and Ethereum spot trades. These products will be provided through cooperation with OSL Digital Securities Limited and BOCI-Prudential Trustee Limited, offering trading and custody services.

In addition, according to Tencent Finance reports, the SFC updated the list of virtual asset management funds on April 10, preparing to announce the first list of Bitcoin ETFs in Hong Kong on April 15. In addition to Harvest Global and China Asset Management, Bosera Funds and Huili Financial are also included in the first batch of approvals, although the latter two have not yet appeared in the latest updated list. According to the plan, the SFC will list the Bitcoin ETFs on the Hong Kong Stock Exchange around April 25, no later than the end of April.

One of the earliest asset management companies in China

Harvest Global Investments is one of the first Chinese asset management companies to set up branches outside China. Since its establishment in 2008, it has developed into a company that occupies an important position in the global asset management industry. The company not only has a deep business foundation in the Asian market, but has also successfully expanded into international financial centers such as London and New York. To date, Harvest Global Investors has more than $20.7 billion in assets under management.

As the parent company of Harvest Global Investments, Harvest Fund Management Co., Ltd. has become one of China’s largest fund management companies since its establishment in 1999, with assets under management exceeding RMB 1.3 trillion. Its shareholders include China Credit Trust Co. (40%), Lixin Investment Co., Ltd. (30%), and Deutsche Asset Management (Asia) Co., Ltd. (30%).

As a wholly-owned subsidiary of China Asset Management Co., Ltd., China Asset Management (Hong Kong) has grown into a leading asset management company in the Hong Kong market since its establishment in Hong Kong in 2008. China Asset Management (Hong Kong) relies on its parent company’s strong influence in the Chinese market and focuses on providing global investors with diversified investment products, including long stock and bond funds, hedge funds and ETFs.

As of the end of 2023, China Asset Management’s total assets under management exceeded US$266 billion. The major shareholders of China Asset Management (Hong Kong) include CITIC Securities (62.2%), Wanxin Investment (13.9%) and Power Corporation of Canada (13.9%). The international background and financial strength of these shareholders provide solid support to the company. China Asset Management is also one of the first nationwide social security fund managers, enterprise annuity fund managers, the first QDII fund managers in China, the first ETF fund managers in China, the first Shanghai-Hong Kong Stock Connect ETF fund managers, and so on, making it one of the fund management companies with the widest range of business areas.

According to a research report by Matrixport quoted by CoinDesk, a Bitcoin spot ETF listed in Hong Kong is expected to attract up to $25 billion in funds from mainland China through the “Southbound Connect” mechanism. The study noted that while the southbound connect mechanism allows up to US$70 billion in capital flows into the Hong Kong stock market each year, the actual amount used is usually lower. This provides a huge source of potential funding for Bitcoin ETFs.

The report further analyzed that with the decline of the RMB exchange rate against the US dollar and the increased interest of Chinese investors in diversified investments, Bitcoin ETF products have become particularly attractive. It is expected to attract not only individual investors but also numerous institutional investors looking for safe-haven opportunities.

Is Hong Kong a lifesaver for Ethereum?

Apart from the heated discussion about the background of the two asset management companies, another issue that everyone is very concerned about is why Hong Kong approved the Ethereum spot ETF earlier than Europe and America?

Compared with the strong performance of Bitcoin in the past year, Ethereum is very weak, the price and increase are not as good as Bitcoin, and not as good as altcoins, the US SEC has postponed the review results of the Ethereum ETF several times. Kong Jianping, the director of Hong Kong Cyberport, believes that “Hong Kong’s first approval of the Ethereum ETF is the lifesaver for Ethereum.”

In the community’s research analysis, the reasons why Hong Kong approved the Ethereum spot ETF earlier than Europe and America are not only attributed to its flexible regulatory environment and open attitude towards financial innovation, but also affected by the following key factors:

1.Adaptability and foresight of the regulatory environment

Hong Kong’s Securities and Futures Commission (SFC) is known for its efficient regulatory framework and rapid response to financial innovation. Compared with the SEC in the United States and various European regulatory agencies, the SFC is more active in exploring how to integrate emerging financial technologies and products, such as cryptocurrency ETFs, into the mainstream market. For example, the SFC began researching and testing regulatory frameworks related to crypto-assets long before other countries, which allowed Hong Kong to quickly adapt to market changes and implement new rules.

2.Strong market driving force

Hong Kong’s financial markets are particularly focused on meeting investor needs, which is particularly prominent among global financial centers. The rapid rise in popularity of cryptocurrencies and related financial products among Hong Kong investors has created opportunities for SFCs to drive innovation in areas that have not been fully explored elsewhere in the world. This market drive has prompted regulators to optimize the approval process in order to more quickly launch products that meet market and investor expectations.

3.Geographical and strategic advantages

As Asia’s financial hub, Hong Kong plays a bridge role connecting Eastern and Western markets. This geographical advantage gives Hong Kong a unique strategic position in global financial dynamics and is able to attract a large amount of international capital to participate in its market. In addition, Hong Kong maintains close ties with mainland China under the policy of “one country, two systems” and also enjoys a relatively independent economic and legal system, which provides it with a unique perspective and experimental field in global financial innovation.

4.Taking the lead to seize the pricing power

“Whoever controls the flow of spot ETFs holds the pricing power”. From the approval of the Bitcoin spot ETF, we can see that Wall Street capital is stronger in controlling Bitcoin’s pricing power. In the global financial market, the mastery of pricing power is crucial to market influence and competitiveness. By first approving the Ethereum spot ETF, Hong Kong not only provides a new investment tool for global investors, but also substantively participates in the struggle for cryptocurrency pricing power.

BlockBeats found that most users on X are not optimistic about Hong Kong’s approval of Bitcoin and Ethereum ETFs, believing that from a market perspective, it has no effect.

On this, some netizens also said: “Be optimistic,this is a process of a region and a country gradually accepting digital currency”.

Hong Kong’s policies a year ago

Over the past year, Hong Kong’s shift to a more cryptocurrency-friendly policy stance has attracted widespread attention from investors within and outside the region. However, this policy change has also triggered discussions about the sustainability of the policy, especially in the development projects of virtual assets such as Bitcoin and Ethereum.

On September 14, Vitalik Buterin spoke in Singapore today and said that although Hong Kong has shifted towards a cryptocurrency-friendly stance since the end of last year, cryptocurrency projects should consider the stability of its friendly policies when setting up offices in Hong Kong.

In response to this, Hong Kong legislator Johnny Ng responded to Ethereum founder Vitalik’s concerns. Legislator Ng emphasized that Hong Kong’s policy-making process has undergone strict procedures and extensive public consultation, ensuring the stability and continuity of the policy. He also invited Vitalik to come to Hong Kong to understand the actual situation personally, emphasizing the transparency and public participation of Hong Kong’s policy.

“Hong Kong’s policies are very stable, and laws will not change overnight,” Legislator Ng wrote publicly on social media platforms.

With the further formulation of policies, the Hong Kong Securities Regulatory Commission clearly stated in the ‘Joint Circular on Virtual Asset-related Activities of Intermediaries’ and the ‘Circular on SFC-approved Fund Investment in Virtual Assets’ released in December 2023, that Hong Kong is ready to accept applications for the recognition of virtual asset spot ETFs. This policy further proves Hong Kong’s open attitude and support for innovative financial products as an international financial center.

These developments indicated that the Hong Kong government has demonstrated clear commitment and support in the virtual asset space, although investors need to assess policy risks in any market. This not only strengthens Hong Kong’s position in the global fintech sector, but also provides international investors and project developers with confidence that Hong Kong can provide a stable and supportive environment for innovation.

As for whether Hong Kong can attain more pricing power on Ethereum and introduce more liquidity funds for the crypto market remains to be seen. However, it is affirmatively worth noting that Hong Kong’s involvement in Bitcoin spot ETF and Ethereum spot ETF has an optimistic outlook.

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