What is the significance of the approval of Hong Kong's BTC and ETH spot ETFs for the industry?

Author: Rhythm Little Worker, BlockBeats

Hong Kong has taken a step ahead of the United States by approving Ethereum spot ETFs.

On April 15, 2024, Harvest Global Investments announced today that it has received in-principle approval from the Hong Kong Securities and Futures Commission (SFC) to launch two digital asset (Bitcoin and Ethereum) spot ETF products. These products will be offered through OSL Digital Securities Limited, the first licensed and regulated digital asset platform in Hong Kong, aiming to effectively address the issues of excessive margin requirements and price premiums caused by shortfalls by accurately reflecting the immediate value of Bitcoin.

On the same day, China Asset Management (Hong Kong) also announced that it has received approval from the Hong Kong SFC and plans to issue ETFs that invest in Bitcoin and Ethereum spot markets. These products will provide trading and custody services in collaboration with OSL Digital Securities Limited and BOCI Global Asset Management Limited.

Additionally, according to Tencent Finance, the Hong Kong SFC updated the list of virtual asset management funds on April 10 and is set to announce the first batch of spot Bitcoin ETFs in Hong Kong on April 15. The first batch of approvals includes Harvest Global Investments and China Asset Management, as well as Bosera Asset Management and Value Partners, although the latter two have not yet appeared on the latest updated list. The SFC is expected to list the spot Bitcoin ETFs on the Hong Kong Stock Exchange around April 25, but no later than the end of April.

One of the Earliest Asset Management Companies in China

Harvest Global Investments is one of the first Chinese asset management companies to establish branches outside of China. Since its establishment in 2008, it has developed into a significant player in the global asset management industry. The company not only has a strong business foundation in the Asian market but has also successfully expanded to international financial centers such as London and New York. As of now, Harvest Global Investments manages over $20.7 billion in assets.

As the parent company of Harvest Global Investments, China Asset Management Company has become one of the largest fund management companies in China since its establishment in 1999, managing assets exceeding 1.3 trillion RMB. Its shareholders include China Chengxin Trust Co., Ltd. (40%), Lixin Investment Co., Ltd. (30%), and Deutsche Asset Management (Asia) Limited (30%).

China Asset Management (Hong Kong), as a wholly-owned subsidiary of China Asset Management Company, has grown into a leading asset management company in the Hong Kong market since its establishment in 2008. Leveraging its parent company's strong influence in the Chinese market, China Asset Management (Hong Kong) focuses on providing diversified investment products for global investors, including long positions in stocks and bond funds, hedge funds, and ETFs.

As of the end of 2023, China Asset Management's total assets under management exceeded $266 billion. The main shareholders of China Asset Management (Hong Kong) include CITIC Securities (62.2%), Wanxin Investment (13.9%), and Canada’s Power Corporation (13.9%), whose international backgrounds and financial strength provide solid support for the company. China Asset Management is also one of the first national social security fund managers, one of the first corporate annuity fund managers, one of the first domestic QDII fund managers, the first domestic ETF fund manager, and the first domestic Shanghai-Hong Kong Stock Connect ETF fund manager, making it one of the fund management companies with the broadest business scope.

According to CoinDesk, citing a research report from Matrixport, the Bitcoin spot ETFs listed in Hong Kong are expected to attract up to $25 billion in funds from mainland China through the "Southbound Trading" mechanism. The research points out that while the Southbound Trading mechanism allows for up to $70 billion in funds to flow into the Hong Kong stock market each year, the actual utilization is often much lower. This presents a significant potential source of funding for Bitcoin ETFs.

The report further analyzes that with the depreciation of the RMB against the USD and the increasing interest of Chinese investors in diversified investments, Bitcoin ETF products are particularly attractive. It is expected that they will not only attract individual investors but also many institutional investors seeking hedging opportunities.

Is Hong Kong a Lifeline for Ethereum?

In addition to the lively discussion about the backgrounds of the two asset management companies, a question of great concern is why Hong Kong approved Ethereum spot ETFs earlier than Europe and the United States.

Compared to the strong performance of Bitcoin over the past year, Ethereum appears to be very weak, with its price and growth not matching Bitcoin and certainly not competing with altcoins. The U.S. SEC has repeatedly delayed the review results for Ethereum ETFs. Hong Kong Cyberport director Kong Jianping believes that "Hong Kong's early approval of Ethereum ETFs is a lifeline for Ethereum."

In community research and analysis, the reasons for Hong Kong's earlier approval of Ethereum spot ETFs compared to Europe and the U.S. are attributed not only to its flexible regulatory environment and open attitude towards financial innovation but also influenced by several key factors:

1. Adaptability and Forward-thinking of the Regulatory Environment

The Hong Kong SFC is known for its efficient regulatory framework and quick response to financial innovation. Compared to the U.S. SEC and various European regulatory bodies, the SFC has been more proactive in exploring how to integrate emerging financial technologies and products, such as cryptocurrency ETFs, into the mainstream market. For example, the SFC began researching and testing regulatory frameworks related to crypto assets earlier than other countries, enabling Hong Kong to quickly adapt to market changes and implement new rules.

2. Strong Market Drive

Hong Kong's financial market places a strong emphasis on meeting investor needs, which is particularly prominent among global financial centers. The popularity of cryptocurrencies and related financial products among Hong Kong investors has rapidly increased, creating opportunities for the SFC to drive innovation in areas that have not been fully explored in other regions. This market drive has prompted regulators to optimize the approval process to launch products that align more quickly with market and investor expectations.

3. Geographical and Strategic Advantages

As a financial hub in Asia, Hong Kong serves as a bridge connecting Eastern and Western markets. This geographical advantage gives Hong Kong a unique strategic position in the global financial landscape, allowing it to attract significant international capital to its markets. Additionally, under the "one country, two systems" policy, Hong Kong maintains close ties with mainland China while enjoying a relatively independent economic and legal system, providing a unique perspective and experimental ground for global financial innovation.

4. Seizing Pricing Power First

"Whoever controls the flow of spot ETFs controls the pricing power." From the approval of Bitcoin spot ETFs, we can see that Wall Street capital is stronger in controlling Bitcoin's pricing power. In the global financial market, holding pricing power is crucial for market influence and competitiveness. By being the first to approve Ethereum spot ETFs, Hong Kong not only provides a new investment tool for global investors but also substantively participates in the competition for cryptocurrency pricing power.

BlockBeats found that most users on Twitter are not optimistic about Hong Kong's approval of Bitcoin and Ethereum ETFs, believing that it does not have a significant impact from a market perspective.

In response, some netizens expressed, "Be a bit more optimistic; this is a process for a region and a country to accept digital currencies."

Hong Kong's Policies from a Year Ago

Over the past year, Hong Kong has shifted to a more cryptocurrency-friendly policy stance, attracting widespread attention from investors both regionally and internationally. However, this policy shift has also sparked discussions about the sustainability of such policies, particularly regarding the development projects of virtual assets like Bitcoin and Ethereum.

On September 14, Vitalik Buterin spoke in Singapore, stating that while Hong Kong has shifted to a cryptocurrency-friendly stance since the end of last year, cryptocurrency projects should consider the stability of this friendly policy when establishing offices in Hong Kong.

In response, Hong Kong Legislative Council member Wu Jiezhuang addressed Vitalik's concerns. He emphasized that Hong Kong's policy-making process involves strict procedures and extensive public consultation, ensuring the stability and continuity of policies. He also invited Vitalik to visit Hong Kong to understand the actual situation, highlighting the transparency and public participation in Hong Kong's policies.

"Hong Kong's policies are very stable, and the law will not change overnight," Wu wrote publicly on social media.

With further policy developments, the Hong Kong SFC clarified in the "Joint Circular on Virtual Asset-Related Activities of Intermediaries" and the "Circular on SFC-Approved Funds Investing in Virtual Assets" released in December 2023 that Hong Kong is ready to accept applications for the recognition of virtual asset spot ETFs. This policy further demonstrates Hong Kong's open attitude and support for innovative financial products as an international financial center.

These developments indicate that while investors need to assess the policy risks of any market, the Hong Kong government has shown a clear commitment and support in the field of virtual assets. This not only enhances Hong Kong's position in the global fintech landscape but also provides confidence to international investors and project developers that Hong Kong can offer a stable and supportive environment for innovation.

Related Reading: "Hong Kong Announces Opening of Bitcoin Spot ETFs, Key Points Overview"

As for whether Hong Kong can truly compete for more pricing power in Ethereum and whether it can bring more liquidity to the crypto market, we will need to observe for a while longer. However, it is certain that Hong Kong's ability to approve Bitcoin spot ETFs and Ethereum spot ETFs is something we can view with optimism.