Research: Which cryptocurrencies are included in the Hong Kong recognized token index?
Under the requirements of the Securities Regulatory Commission, there are currently 13 types of crypto assets available as alternatives for retail trading, namely: BTC, ETH, ADA, SOL, MATIC, DOT, LTC, AVAX, UNI, LINK, AAVE, BCH, and CRV.Author: William
Authorized release by Wu Says Blockchain
I. Interpretation of Hong Kong's Virtual Asset Index Policy
Since the Hong Kong government released its Web 3.0 vision last year, both traditional institutions and Web 3.0 companies have been particularly focused on the market opportunities it presents. Recently, with the Hong Kong Securities and Futures Commission's regulatory documents on virtual asset trading officially finalized, the future trends worth paying attention to have become increasingly clear—virtual asset indices are one of them.
According to the policy documents, virtual asset digits hold an important strategic position in the future Hong Kong market: regulatory requirements state that virtual assets available for retail trading must be included in at least two accepted virtual asset indices launched by at least two different index providers. This means that virtual asset indices will be the main arbiters of "retail trading assets."
To further clarify which virtual asset indices are qualified and to prevent issues of interest transfer, the Hong Kong Securities and Futures Commission clearly states:
(1) Virtual asset indices issued by virtual asset issuers and exchanges are disqualified.
(2) At least one index must comply with the "Financial Benchmark Principles" and be issued by a company with experience in traditional securities market indices.
From the above regulations, it can be seen that this effectively grants traditional financial companies a de facto "franchise"—virtual assets not included in indices issued by traditional financial companies are not allowed to be offered for trading to retail investors.
So, regarding the current virtual asset indices in the market, which virtual assets are likely to be allowed for retail trading? Based on market data, the main institutions currently providing virtual asset indices and recognized by the market include six entities: Galaxy, 21Shares, CF Benchmarks, Bitwise, Wisdomtree, and Wilshire.
Among them, Galaxy collaborates with Bloomberg to issue virtual asset indices; the indices issued by CF Benchmarks have been widely used on CME and Nasdaq; Wilshire, as a well-established index issuing company, currently collaborates with the Financial Times to issue virtual asset indices, thus it can be considered that the above three companies all meet the criteria of "complying with the Financial Benchmark Principles and having experience in issuing indices in the traditional securities market."
It can be summarized that, under the requirements of the Securities and Futures Commission, there are currently 13 cryptocurrencies that can serve as alternatives for retail trading, namely: BTC, ETH, ADA, SOL, MATIC, DOT, LTC, AVAX, UNI, LINK, AAVE, BCH, and CRV.
Of course, the above-mentioned cryptocurrencies may not necessarily be allowed for retail trading. This is because assets available for retail trading must meet three conditions: "exchange due diligence + qualified large virtual assets + written approval from the Securities and Futures Commission." For example, the current operational status of SOL and BCH is not optimistic and may be excluded by the Securities and Futures Commission.
Table 1 Virtual Asset Index Issuance Status
Source: Meta Lab
Table 2 Alternative Virtual Assets Available for Retail Clients
Source: Meta Lab
II. Feasibility Assessment of Virtual Asset Index Business
To this day, developing a virtual asset index business remains a new topic for the Web 3.0 industry, mainly because index businesses are generally established in mature, compliant markets, serving as market barometers and performance benchmarks. However, over the past decade, the virtual asset market has remained in an early, chaotic stage, with few high-quality assets that have good liquidity, and the market lacks asset management institutions, making it difficult for index businesses to survive. Therefore, despite the emergence of numerous startups focused on virtual asset indices in the past five years, only a few have survived. Now, with the compliance of the Hong Kong market, especially as the Hong Kong regulatory authorities place significant importance on indices, the virtual asset index business is ushering in a new round of development opportunities.
1. Business Feasibility Analysis
As mentioned earlier, due to the immaturity of the virtual asset market, many index startups that emerged in the past five years have nearly vanished, and the surviving companies mainly fall into two categories:
One is to issue asset management products based on the compilation of virtual asset indices. A typical example is Galaxy, which issued Galaxy Crypto Index Funds after collaborating with Bloomberg on indices; similarly, 21Shares has issued a large number of virtual asset ETPs. Currently, the vast majority of companies with index businesses operate this way.
The second is to combine virtual asset indices with news and information, such as the FT Wilshire Top 5 Digital Assets Index issued by the well-established index company Wilshire in collaboration with the Financial Times, which provides market information to readers in the Financial Times.
Of course, considering the trend of virtual assets gradually becoming compliant and being incorporated into traditional financial markets, the future market will not require numerous virtual asset indices, and the business model will gradually align with traditional markets, making the index business model in traditional securities markets worth referencing.
Taking the U.S. S&P company as an example, currently, the company's index business (S&P Dow Jones Indices) accounts for about 11% of its total revenue, with index revenue coming from three main sources: asset-linked fees, subscription fees, and sales royalties.
From S&P's actual operational situation, the index business exhibits the following three characteristics:
First, the gross margin and operating profit margin of the index business are very high. For example, in the past decade, S&P's index business has maintained an average gross margin of around 83% and an operating net profit margin of around 65%, higher than the combined metrics of S&P's other businesses. The main reason is that, excluding inflation factors, the costs of the index business are relatively fixed, and as the number of clients increases, economies of scale are formed, leading to a decrease in cost rates and high profit margins.
Figure 1 S&P's Gross Margin Over the Past Decade
Source: Wind, Meta Lab
Figure 2 S&P's Operating Net Profit Margin Over the Past Decade
Source: Wind, Meta Lab
Second, the revenue increment of the index business is substantial. Over the past decade, S&P's index business revenue has grown from $490 million in 2013 to $1.34 billion in 2022, which is a significant increase. The main reason is that over the past decade, the scale of global index funds and ETFs has grown from $1 trillion in 2008 to around $10 trillion by the end of 2022, accompanied by an increase in index-linked fees.
Figure 3 S&P's Revenue Over the Past Decade (in $10,000)
Source: Wind, Meta Lab
Finally, the revenue scale of the index business is limited. According to industry estimates, the scale of index business in traditional securities markets does not exceed $10 billion. It is particularly noteworthy that even for leading companies like S&P, the primary source of their operating revenue is not from the index business. From the revenue composition in 2022, market intelligence and rating services accounted for over 60%, while indices only accounted for 11.8%.
Figure 4 Composition of S&P's Business Revenue in 2022
Source: Wind, Meta Lab
2. Future Development Assessment of Virtual Asset Index Business
From the historical development of traditional index businesses, market indices originated in the latter half of the 19th century (the Dow Jones Index in 1884), primarily serving as financial indicators to provide market information, and their profitability has always been an issue. It wasn't until the 1960s that the business model of index businesses gradually became clear: in the 1970s, the emergence of ETFs and mutual fund products tracking indices marked the transition of indices from investment benchmarks to investment targets, making asset-linked fees possible; in 1993, the SEC's final rule on "Disclosure of Mutual Fund Performance and Portfolio Managers" came into effect, which for the first time required mutual funds to provide specific performance benchmarks to investors and mandated that funds compare their returns with appropriate securities market indices in graphical form, thus indices officially became essential benchmarks for evaluating fund performance, leading major asset management companies to start paying subscription fees to index companies.
It can be seen that the maturity of the profitability model of indices in the traditional securities market is mainly due to the rise of index-linked asset management products and regulatory requirements from the SEC to provide performance benchmarks. In the current virtual asset index business field, institutional clients are still immature, with the number of institutions being relatively small compared to index clients; index products are scarce, primarily consisting of Bitcoin and Ethereum ETFs.
Based on the above realities, I believe that the future virtual asset index business in Hong Kong will mainly exhibit three characteristics:
(1) Currently, those engaged in virtual asset index business should be prepared for the possibility of this business not being profitable for the next 3-5 years. The key to future profitability lies in whether the virtual asset derivatives market is opened up. If the derivatives market is opened to the public, then indices will likely serve as reference prices for derivatives, allowing exchanges or issuers to charge certain royalties. Alternatively, after the derivatives market opens, the number of professional asset management institutions in the virtual asset field may further increase, issuing more index products.
(2) The virtual asset index business should be treated as a subsidiary business rather than a main business. As mentioned earlier, historically, companies with index businesses have not primarily focused on indices but rather on rating and intelligence services.
(3) The virtual asset index business is more suitable for traditional financial institutions rather than Web 3.0 startups. The main reason, aside from the aforementioned qualifications required by the SFC for index providers, lies in market competitiveness—corporate brand and reputation have a significant impact on index businesses. For example, it is evident which has stronger market credibility and dissemination power: a virtual asset index published by Bloomberg or one by a startup.
Of course, index businesses adhere to a "long-termism" approach. As analyzed in the case of S&P, although profitability in the early stages of index business is challenging, once the virtual asset market matures further, there is a tendency for "winner-takes-all" scale advantages and low-cost, high-profit margin phenomena to emerge under first-mover conditions.
