Hot on their heels: Hong Kong Bitcoin ETF explodes

Recently, a noisy week finally came to an end as the U.S. Securities and Exchange Commission finally approved the listing of a spot Bitcoin ETF.

Now, investors are turning their attention to another market full of potential: Hong Kong.

Previously, the Hong Kong Securities and Futures Commission mentioned in a circular that it was “ready to accept applications for virtual asset spot ETFs.” Luo Boren, head of securities product development at the Hong Kong Stock Exchange (00388), pointed out that the Hong Kong Stock Exchange is ready to seize the opportunities brought by thematic investment and will work closely with issuers and stakeholders to smoothly introduce such new products to the Hong Kong ETF market.

He said that he welcomed the announcement by the Hong Kong Securities and Futures Commission, which would make Hong Kong the first market in Asia to allow the listing of virtual asset spot ETFs, strengthen Hong Kong's position as the region's leading digital asset center, and support Hong Kong's continued development as Asia's preferred ETF market.

According to Bloomberg, Hong Kong financial services company Venture Smart Financial Holdings Ltd. (VSFG) said it plans to apply to the Hong Kong Securities and Futures Commission to launch a direct investment in Bitcoin ETF. "This is a market with huge potential."

Brian Chan, head of the firm's investment and product group, said: "Our goal is to have $500 million in assets under management by the end of this year."

The SFC said it would not comment beyond the guidance due in December 2023. If the history of traditional ETFs is a guide, the approval process for such products could take weeks to months.

VSFG provides both traditional and digital wealth management services and is one of the first virtual asset management companies approved by the SFC in Hong Kong, according to its website.

ETF Development History

Bitcoin is a decentralized digital currency that has attracted the attention and popularity of investors around the world since its inception.

However, Bitcoin's high market volatility, unclear regulatory environment, and high transaction thresholds have all limited the popularity and development of Bitcoin.

In order to solve these problems, a new financial product came into being, that is, Bitcoin ETF (Exchange Traded Fund). Bitcoin ETF is a fund listed and traded on traditional stock exchanges, which allows investors to participate in Bitcoin investment more conveniently and safely at a lower cost and risk.

Hong Kong currently allows futures-based cryptocurrency ETFs, and there are currently three listed, namely CSOP Bitcoin Futures, CSOP Ethereum Futures and Samsung Bitcoin Futures.

Their total assets are relatively small, about $50 million. Samsung Asset Management said it would not rule out exploring the possibility of launching a spot ETF.

There are two main types of Bitcoin ETFs: Bitcoin futures ETFs and Bitcoin spot ETFs. Bitcoin futures ETFs refer to funds that invest in Bitcoin futures contracts, while Bitcoin spot ETFs refer to funds that directly hold Bitcoin.

Globally, the development of Bitcoin ETFs is still in its early stages, and currently only a few countries and regions have approved the listing of Bitcoin ETFs.

Among them, Hong Kong, as the financial center of Asia, has recently issued a series of regulatory policies on virtual assets, clearly stating that it is "ready to accept recognition applications for virtual asset spot ETFs."

This move has attracted widespread attention in the market and is considered a major breakthrough for Bitcoin ETFs. It is also an important sign of the formalization, legalization and recognition of Bitcoin.

Regulatory requirements and issuance conditions for Hong Kong Bitcoin spot ETFs

Bitcoin spot ETF refers to a fund that directly holds Bitcoin. Investors of Bitcoin spot ETF can enjoy the ownership and use rights of Bitcoin, and can also more accurately reflect the market value of Bitcoin.

However, Bitcoin spot ETFs also face higher technical and regulatory challenges, such as how to safely store and transfer Bitcoin, how to prevent money laundering and terrorist financing, etc.

On December 22, 2023, the Hong Kong Securities and Futures Commission issued the "Circular on SFC-approved Funds Investing in Virtual Assets" (hereinafter referred to as the "Fund Circular"), clearly stating that it is "ready to accept applications for the approval of virtual asset spot ETFs." This is another important regulatory policy of the Hong Kong Securities and Futures Commission on virtual assets after the release of the "Joint Circular on Virtual Asset-Related Activities of Intermediaries" (hereinafter referred to as the "Joint Circular") in October 2023.

The fund circular mainly stipulates the regulatory requirements and issuance conditions of the Hong Kong Bitcoin spot ETF, mainly including the following aspects:

Issuer qualifications: Asset management companies that issue virtual asset fund products need to meet the following three conditions: have a good regulatory compliance record; the company has at least one competent employee with experience in virtual asset and related product management; the company needs to hold an upgraded Type 9 license, that is, comply with the "Standard Terms and Conditions for Licensed Corporations Managing Investment Portfolios Investing in Virtual Assets".

Underlying asset requirements: The underlying assets of a virtual asset spot ETF must be virtual assets that are currently available for retail users to trade on a licensed exchange in Hong Kong. Currently, this means that only Bitcoin and Ethereum meet the criteria.

Subscription and redemption of spot virtual assets: Virtual asset spot ETFs can be subscribed and redeemed in cash or in kind, but must be done on a licensed exchange or other regulated financial institution in Hong Kong. Traders participating in subscription and redemption need to hold an upgraded Type 1 license, that is, comply with the Standard Terms and Conditions for Licensed Corporations Managing Portfolios Investing in Virtual Assets.

Custody: Virtual assets must be held by a third-party independent custodian, which must be a licensed exchange in Hong Kong or other regulated financial institution. Custody accounts must be separated from the asset management company's own accounts, with most assets placed in cold wallets and a small portion placed in hot wallets for redemption. Private keys must be kept safe and stored in Hong Kong to effectively prevent external attacks and be properly backed up.

What the industry thinks

According to Weng Xiaoqi, CEO of HashKey Exchange, one of Hong Kong's licensed virtual asset trading platforms, about 10 fund companies are currently preparing to launch virtual asset spot ETFs in Hong Kong, and about 7 to 8 are already in the actual promotion stage.

It is reported that issuers may need to use licensed exchanges to custody underlying assets and provide trading, clearing and other services. Several issuers have chosen Hashkey to provide them with infrastructure, and Hashkey will even work with issuers to apply for spot Bitcoin ETF licenses.

OKX Global Chief Commercial Officer Jimmy Lai said that the approval of Bitcoin ETF in the United States means that different types of traditional investment tools, such as large-scale funds such as pensions and retirement funds, can now invest directly in Bitcoin, which means that investors from a wider background, including retail and institutional investors, can participate in the Bitcoin market.

In addition, Bitcoin ETFs are physically settled, and capital invested in such ETFs will have a more direct impact on the spot price of Bitcoin, which will bring positive attention and a large amount of capital inflow to the virtual asset market, and play a key role in the long-term development of the industry.

Wang Yi, director of quantitative investment at Southern East Investment, one of the issuers of virtual asset futures ETFs in Hong Kong, also said that after the US SEC approved the spot ETF, traditional financial institutions could buy Bitcoin through the spot ETF, further increasing the market demand for Bitcoin. As the total supply of Bitcoin is limited, the increase in demand may push up the price of Bitcoin.

Chen Peiquan, executive director of Victory Securities, a licensed virtual asset broker in Hong Kong, pointed out that the US regulators' permission for the listing of spot Bitcoin ETFs is seen as the key to connecting virtual currencies with physical exchanges, and is bound to attract more investors to participate.