KEYTAKEAWAYS
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Innovative Regulatory Response: Hong Kong's early approval of a spot Ethereum ETF showcases its proactive and adaptable regulatory stance, facilitating faster integration of emerging financial products.
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Strategic Market Position: As a leading financial hub, Hong Kong leverages its strategic geographical advantages to attract international capital and influence global financial markets.
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Implications for Crypto Market: The introduction of spot Ethereum and Bitcoin ETFs in Hong Kong could enhance market liquidity and pricing power, reflecting the region's growing influence in the crypto sector.
CONTENT
Hong Kong has taken a step ahead of the United States in approving a spot Ethereum ETF. Harvest Global Investments announced on April 15, 2024 that it has been granted provisional approval by the Hong Kong Securities and Futures Commission (SFC), the firm is set to launch two digital asset spot ETF products, Bitcoin and Ethereum. These products, which aim to accurately reflect the instant value of Bitcoin, will be offered through OSL Digital Securities, the first licensed digital asset platform under the protection of the SFC, addressing issues like high margin requirements and the lack of short positions causing price premiums.
On the same day, China’s Huaxia Fund (Hong Kong) also received approval from the SFC to issue ETFs that invest in Bitcoin and Ethereum spot markets, with transaction and custody services provided through a collaboration with OSL Digital Securities and BOCI-Prudential.
Additionally, Tencent Finance reported that the SFC updated its list of virtual asset management funds on April 10, preparing to announce Hong Kong’s first Bitcoin spot ETFs on April 15. Apart from Harvest Global and Huaxia Fund, the initial approvals also include Bosera Funds and Value Partners, though the latter two were not listed in the latest update.
Scheduled by the SFC, the Bitcoin spot ETFs are expected to be listed on the Hong Kong Stock Exchange around April 25, 2024, at the latest by the end of April.
THOSE WHO GET APPROVED FIRST
Harvest Global Investments, one of the first asset management firms to establish branches outside China since its inception in 2008, has grown to hold a significant position in the global asset management industry, managing assets totaling over $20.7 billion. As the parent company, Harvest Fund Management, founded in 1999, is one of the largest fund management companies in China, managing over 1.3 trillion RMB, with stakeholders including Zhongcheng Trust (40%), Lixin Investment (30%), and Deutsche Asset Management (Asia) (30%).
Huaxia Fund (Hong Kong), a wholly-owned subsidiary of Huaxia Fund Management established in Hong Kong in 2008, has become a leading asset management company in the Hong Kong market. With a total asset management size exceeding $266 billion as of the end of 2023, its major shareholders include CITIC Securities (62.2%), Wanxin Investment (13.9%), and Canada’s Power Corporation (13.9%).
According to a Matrixport research report cited by CoinDesk, the Bitcoin spot ETF listed in Hong Kong is expected to attract up to $25 billion from mainland China through the “Southbound” mechanism, though the actual quota used is typically lower. This provides a significant potential funding source for the Bitcoin ETF, especially attractive to individual and institutional investors seeking diversification and hedging opportunities amid the falling RMB against the dollar.
IS HONG KONG A LIFELINE FOR ETHEREUM?
The community is buzzing not only with discussions about the backgrounds of the two asset management companies but also with concerns regarding why Hong Kong has approved the Ethereum spot ETF earlier than Europe and the U.S. Compared to the strong performance of Bitcoin over the past year, Ethereum has appeared relatively weak, its price and gains lagging behind Bitcoin and being outperformed by altcoins. The U.S. SEC has repeatedly delayed its decision on Ethereum ETFs. Kong Jianping, a director at Hong Kong Cyberport, believes that Hong Kong’s early approval of the Ethereum ETF is a lifeline for Ethereum.
Analyses within the community attribute Hong Kong’s earlier approval of the Ethereum spot ETF not only to its flexible regulatory environment and openness to financial innovation but also to several key factors:
- Adaptability and Proactivity of Regulatory Environment:
The Hong Kong Securities and Futures Commission (SFC) is known for its efficient regulatory framework and quick response to financial innovations. Compared to the SEC in the U.S. and regulatory bodies in Europe, the SFC has been more proactive in exploring how to integrate emerging financial technologies and products like crypto ETFs into mainstream markets. For instance, the SFC began researching and testing regulatory frameworks related to crypto assets earlier than other countries, allowing Hong Kong to swiftly adapt to market changes and implement new rules.
1. Strong Market-Driven Forces:
Hong Kong’s financial market is particularly attentive to meeting investor needs, a trait that stands out among global financial centers. The rising popularity of cryptos and related financial products among investors in Hong Kong has created opportunities for the SFC to drive innovation in areas not yet fully explored in other regions. This market drive has prompted regulatory authorities to optimize approval processes to more quickly release products that meet market and investor expectations.
2. Geographical and Strategic Advantages:
As a financial hub in Asia, Hong Kong serves as a bridge connecting the Eastern and Western markets. This geographical advantage gives Hong Kong a unique strategic position in global financial dynamics, enabling it to attract substantial international capital. Additionally, under the “one country, two systems” policy, Hong Kong maintains close ties with mainland China while also enjoying a relatively independent economic and legal system, providing a unique perspective and experimental ground for global financial innovation.
3. Early Capture of Pricing Rights:
“Who controls the ETF flow, controls the pricing rights.” The passage of the Bitcoin spot ETF shows that Wall Street capital is more dominant in controlling Bitcoin’s pricing power. In the global financial market, the mastery of pricing rights is crucial for market influence and competitiveness. By approving the Ethereum spot ETF ahead of others, Hong Kong not only provides new investment tools to global investors but also substantially participates in the competition for crypto pricing rights.
While most users on Twitter are not optimistic about Hong Kong’s approval of Bitcoin and Ethereum ETFs, viewing them as having no effect from a market perspective, others suggest a more positive view: “Be optimistic; this is the process of a region or a country gradually accepting digital currencies.”
HONG KONG’S POLICY OVER THE PAST YEAR
Over the past year, Hong Kong has shifted towards a more crypto-friendly policy stance, attracting widespread attention from investors both within the region and internationally. However, this policy shift has also sparked discussions about the sustainability of such policies, especially in projects involving virtual assets like Bitcoin and Ethereum.
On September 14, 2023, Ethereum founder Vitalik Buterin spoke in Singapore, noting that although Hong Kong has adopted a pro-crypto stance since the end of last year, crypto projects considering establishing offices in Hong Kong should be cautious about the stability of these friendly policies.
In response, Hong Kong legislator Wu Jiezhuang addressed Vitalik’s concerns, emphasizing that Hong Kong’s policy-making process is rigorous, involving extensive public consultation to ensure policy stability and continuity. He also invited Vitalik to visit Hong Kong to understand the situation firsthand, highlighting the transparency and public involvement in Hong Kong’s policies.
“Wu stated on social media that ‘Hong Kong’s policies are very stable, and the laws do not change overnight.'”
With further policy development, the SFC’s December 2023 issuance of “Joint Circular on Virtual Asset-related Activities of Intermediaries” and “Circular on SFC-Recognized Funds Investing in Virtual Assets” explicitly indicated that Hong Kong is ready to accept applications for virtual asset spot ETFs. This policy further demonstrates Hong Kong’s openness and support for innovative financial products as an international financial center.
These developments not only enhance Hong Kong’s position in the global fintech sector but also provide confidence to international investors and project developers that Hong Kong offers a stable and supportive environment for innovation.
FURTHER OBSERVATIONS NEEDED
While it remains to be seen whether Hong Kong can truly gain more pricing power over Ethereum or bring more liquidity to the crypto market, the approval of Bitcoin and Ethereum spot ETFs in Hong Kong is a development worth viewing optimistically.
