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Hong Kong’s Crypto ETFs Face Limited Impact Without Mainland Chinese Investors, Pale in Comparison to U.S. Market

ByDayne Lee

Apr 16, 2024
Hong Kong's Crypto ETFs Face Limited Impact Without Mainland Chinese Investors, Pale in Comparison to U.S. Market

Hong Kong’s Crypto ETFs Face Limited Impact Without Mainland Chinese Investors, Pale in Comparison to U.S. Market

The Securities and Futures Commission (SFC) of Hong Kong has recently granted conditional approvals for three pioneering spot Bitcoin and Ether exchange-traded funds (ETFs). These approvals signal an emerging trend in the Asian financial hub’s embrace of digital assets. However, the potential scale of impact compared to the U.S. market appears limited due to regulatory constraints barring mainland Chinese investors.

Overview of Approvals and Market Development

Following the initial conditional approval from the SFC, asset managers like Harvest Global Investments, HashKey Capital in partnership with Bosera Asset Management (International), and the Hong Kong unit of China Asset Management are set to apply for listings on the Hong Kong Exchanges and Clearing. These steps are crucial for the official launch of their respective products.

  • Harvest Global Investments: Received conditional approval for Bitcoin and Ether ETFs.
  • HashKey Capital and Bosera Asset Management (International): Jointly approved for similar ETF offerings.
  • China Asset Management: Approved to provide virtual asset management services and is developing related products.

OSL Digital Securities is poised to provide custodial services for these innovative products, enhancing the security and integrity of the transactions involved. This collaboration underscores the growing ecosystem supporting cryptocurrency investments in Hong Kong.

The U.S. market has witnessed substantial success with the introduction of Bitcoin ETFs, such as BlackRock’s IBIT and Fidelity’s FBTC, which are among the top performers in their category. By contrast, the anticipated volume of Hong Kong’s ETFs is expected to be modest due to the exclusion of mainland Chinese investors, who face regulatory restrictions from participating.

  • U.S. Market: Valued at approximately $8.87 trillion, with crypto ETFs managing over $56.2 billion.
  • Hong Kong Market: Valued around $50 billion, with potential new crypto ETFs expected to manage between $500 million to $1 billion.

Regulatory and Market Limitations

Despite the enthusiasm for these new offerings, the restriction that prevents mainland Chinese investors from accessing these ETFs through the Stock Connect significantly limits their potential market impact. According to Eric Balchunas, a senior ETF analyst at Bloomberg, these products will not be available to mainland investors, a major limitation considering the substantial capital they could potentially bring.

  • Eric Balchunas: Highlights the regulatory barriers and modest expected inflows from local investors compared to the U.S.
  • Justin d’Anethan: Discusses the unique aspects of the Hong Kong spot Ether ETFs and their potential as a global case study.

Strategic Implications and Investor Impact

The unique subscription and redemption mechanism of these ETFs, which allows for direct swaps between Bitcoin or Ether tokens and ETF units, contrasts with the cash redemption model used in the U.S. This structure is anticipated to reduce costs related to transfers and foreign exchange, making these ETFs potentially more attractive on a transactional basis.

  • Cost Efficiency: Lower transaction and foreign exchange costs due to the in-kind subscription and redemption mechanism.
  • Market Innovation: First-of-its-kind offering of Ether ETFs, providing Hong Kong with a unique positioning in the global market.

While Hong Kong is advancing its position in the global cryptocurrency market by introducing these ETFs, the overall impact may remain limited due to regulatory restrictions preventing mainland Chinese investors from participating. This situation presents both challenges and opportunities for Hong Kong’s financial market, as it navigates the complexities of integrating traditional financial mechanisms with innovative digital asset solutions.

Featured image credit: Chan Long Hei via Getty Images

Dayne Lee

With a foundation in financial day trading, I transitioned to my current role as an editor, where I prioritize accuracy and reader engagement in our content. I excel in collaborating with writers to ensure top-quality news coverage. This shift from finance to journalism has been both challenging and rewarding, driving my commitment to editorial excellence.

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