Original source: Xiao Sa team
On April 15, 2024, three fund companies announced through social media that they had been approved to issue ETF financial products that can invest in spot Bitcoin and spot Ethereum. The news immediately triggered a reaction in the global capital market. As the city in Asia that has gone the furthest and fastest in the operation of crypto asset financial capital, Hong Kong has added fuel to the crypto bull market with its own strength.
Today, the Sajie team will analyze Hong Kong’s encryption policy from the perspective of the significance of the approval of the online issuance of Bitcoin and Ethereum spot ETFs in Hong Kong for investors, and help everyone make more rational judgments.
1. Background of the approval of Hong Kong Bitcoin/Ethereum ETF
Not long ago, the U.S. Securities and Exchange Commission approved more than a dozen Bitcoin spot ETFs at one go, which became a milestone event in the cryptocurrency market. Now, Hong Kong, as a pioneer in cryptocurrency in Asia, has also approved the issuance of cryptocurrency ETF products (including Bitcoin and Ethereum), which not only provides investors with more choices, but also provides an opportunity for further integration of the traditional capital market and the crypto world.
For Hong Kong citizens, the Hong Kong Bitcoin/Ethereum ETF means that local residents can directly use their securities accounts to purchase spot Bitcoin and Ethereum without having to open an account on a crypto asset exchange.
1. Clear information was disclosed before the issuance of Hong Kong crypto asset spot ETF
In fact, the Hong Kong SFC had already given clear information about the spot of crypto asset ETFs half a year ago. On December 22, 2023, the SFC issued the Circular on the Hong Kong SFC Authorizing Funds to Invest in Virtual Assets and the Joint Circular on Virtual Asset-Related Activities of Intermediaries. In the two circulars, the SFC clarified the relevant regulations on the issuance and management of public fund products with virtual assets accounting for more than 10%, and also made requirements in terms of the subscription, redemption, custody, and valuation of crypto assets. The Circular on the Hong Kong SFC Authorizing Funds to Invest in Virtual Assets also clearly pointed out that Hong Kong may approve spot ETFs for mainstream crypto assets such as Bitcoin and Ethereum, and users can choose to subscribe and redeem with cash or crypto assets.
Therefore, for those who are familiar with the regulatory direction of crypto assets in Hong Kong, the approval of Bitcoin and Ethereum spot ETFs in Hong Kong is not surprising. In terms of the selection of crypto asset exchanges, according to public sources, two of the approved funds chose OSL, while the other chose to work with HashKey. It can be seen that OSL and HashKey have begun to show their huge advantages as licensed crypto asset trading platforms approved to allow retail customers to trade. It is worth mentioning that HashKey Capital Limited (HashKey Capital), a crypto asset investment institution under HashKey, has recently obtained the SFCs No. 9 license upgrade, and has obtained professional investor exemptions, which allows it to provide services to a wider range of users.
2. What are the differences between crypto asset spot ETFs in Hong Kong and the United States?
The Sajie team believes that there are two main differences between Hong Kong’s crypto asset spot ETFs and those in the United States:
1. Different underlying assets
The scope of crypto asset ETFs approved by the SFC in Hong Kong, my country is larger than that in the United States, including not only Bitcoin spot ETF transactions, but also Ethereum spot ETF transactions. Among the more than ten crypto asset spot ETFs approved by the United States in January 2024, only Bitcoin is included, and there is no news about the approval of other crypto asset ETFs. In the previous analysis article, the Sajie team has explained that US regulators have always maintained a cautious attitude towards crypto assets.
The Sajie team believes that the simultaneous approval of Bitcoin and Ethereum ETFs is a huge leap forward for Hong Kong regulators. It is not only a pioneering move, but also a major encouragement to the Web3 industry and the world of encrypted assets.
2. Different subscription and redemption methods
In terms of subscription and redemption methods, ETFs in Hong Kong can be redeemed not only with cash, but also with crypto assets. In simple terms, Bitcoin or Ethereum can be used to purchase SEF assets directly. Compared with ETFs in the United States, this move is obviously more Web3. However, the Sajie team reminds us that in terms of specific operations, the use of crypto assets to redeem ETF products will inevitably be subject to stricter supervision, especially for the subscription and redemption of large amounts of crypto assets, which need to comply with the strict KYC of Hong Kong financial institutions.
2. What does Hong Kong crypto asset ETF mean to investors?
Sister Sa’s team will give you a brief introduction mainly based on the advantages and disadvantages of Hong Kong’s crypto asset ETF.
1. Advantages of Hong Kong Crypto Asset ETFs
Low technical threshold for investment. Hong Kong crypto asset spot ETFs can be traded directly on the Hong Kong Stock Exchange in a similar way to traditional securities, without the need for more complicated registration and KYC on major crypto asset trading platforms in Hong Kong. This move greatly reduces the technical threshold for crypto asset trading. At the same time, due to the problem of capital volume, traditional stock exchanges have higher liquidity than most existing crypto asset trading platforms, and relevant regulatory measures are more complete.
2. Crypto assets are relatively more secure. Simply put, buying crypto asset spot ETFs does not require the actual holding and storage of Bitcoin, Ethereum and other assets, and investors no longer have to worry about losing their stored cryptocurrency private keys (a client served by Sister Sa’s team once lost a large number of Bitcoin private keys due to improper storage).
3. Tax benefits. From a more realistic perspective, investing in crypto asset spot ETFs can also obtain certain tax benefits under certain circumstances. Specifically, the legal nature of crypto asset spot is relatively certain at present as securities, but other jurisdictions (especially those that have begun or are planning to impose taxes on crypto assets) have the situation of treating cryptocurrencies such as Bitcoin and Ethereum as property. In the case that Hong Kong agrees to directly purchase spot crypto asset ETFs with cryptocurrencies, high property taxes can be avoided by replacing crypto assets with spot ETFs. In addition, assuming that the underlying crypto asset bull market can last for a long time, it can also enjoy the low tax preferential policies of various jurisdictions that encourage long-term holding of securities.
2. Notes on Crypto Asset Spot ETFs
1. Crypto asset spot ETFs cannot avoid the investment risks of crypto assets themselves. Investors need to understand that crypto asset spot ETFs are just an investment tool and cannot isolate the investment risks of crypto assets themselves. Of course, crypto asset ETFs themselves are investment portfolios, and multiple investment targets can dilute the risks of crypto assets, but risks always exist.
2. Investment time difference. Crypto asset ETF is not the crypto asset itself, but an investment product that dynamically fluctuates by tracking and anchoring the price of the underlying crypto asset. Then there is a risk of investment time difference. In other words, if the crypto asset ETF itself cannot anchor the price of the crypto asset very timely, then it is very likely that the ETF and the crypto asset will be temporarily decoupled, causing investors to miss investment opportunities in the crypto ecosystem where one day in the cryptocurrency world is one year in the real world.
3. Final Thoughts
In short, the approval of the ETF is a historic event for the Hong Kong crypto asset market. It means that Hong Kong has effectively fulfilled its commitment to embracing crypto assets and has taken another step towards becoming a crypto asset financial center. For investors, ETFs lower the technical threshold for Hong Kong investors to invest in crypto assets. This investment method, which is more secure and has greater tax benefits, is more in line with the interests of relevant investors in the long run. For the traditional capital market, at a time when my countrys economic development is under pressure, the advantages of crypto assets as an emerging investment product are enough to attract some funds to favor them.
At present, as long as the funds are in Hong Kong, you can directly purchase crypto asset spot ETFs, but due to legal restrictions, Chinese securities firms are temporarily unable to directly access this product. Although there are no clear regulatory guidelines, referring to Hong Kongs previous consistent policies, residents in mainland my country may still not be able to purchase directly. Of course, the approval of this ETF is just the beginning of this milestone product, and its subsequent development will make us wait and see in the future.
