Hong Kong Bitcoin Spot ETF in Progress: Custody Services Become a New Track, Initial Capital Inflow Scale Approximately 500 Million to 1 Billion USD

Author: Nianqing, ChainCatcher

On April 15, Huaxia Fund (Hong Kong), Bosera Fund (International) Co., Ltd., and Harvest Global Investments announced that they had received conditional approval from the Hong Kong Securities and Futures Commission (SFC) to issue Bitcoin and Ethereum spot ETFs. However, shortly after, Bosera and Harvest deleted related articles. As of the time of publication, the SFC's official website had not yet published the list of the first batch of approved virtual asset ETFs.

On the evening of April 15, the SFC's official website updated the list of virtual asset management companies, adding Bosera Fund (International) Co., Ltd. The previous update was on April 12. According to a report by Tencent Finance's "First Line," the SFC originally planned to approve a total of four Bitcoin spot ETFs in the first batch, including Huaxia Fund, Bosera Fund, and Harvest Global Investments, in addition to Harvest. Currently, only Huaxia Fund is not on the list of virtual asset management companies, and there was no related news from its official channels yesterday.

Following the U.S. formal approval of 11 Bitcoin spot ETFs on January 11, Hong Kong has also caught up, becoming the next jurisdiction to approve the issuance of Bitcoin and Ethereum spot ETFs.

Overview of the First Three Approved Issuers

Harvest Global Investments is a wholly-owned subsidiary of Harvest Fund Management Co., Ltd., established in 2008. As of 2023, Harvest Global manages assets exceeding $200 billion. In November last year, Harvest Global and the asset management platform OSL submitted a proposal to the SFC, planning to explore the launch of tokenized retail fund products (Fund Tokens) in the Hong Kong retail market, and completed the issuance of Hong Kong's first tokenized fund in December. On January 26, 2024, Harvest Global announced it would be the first applicant for a Hong Kong Bitcoin spot ETF. On April 10, Harvest obtained Virtual Asset License No. 9.

Huaxia Fund (Hong Kong) is the overseas subsidiary of Huaxia Fund, established in Hong Kong in 2008, and is one of the first Chinese asset management companies to go overseas. The parent company, Huaxia Fund, is one of the largest fund companies in China, with total assets under management exceeding $266 billion as of December 31, 2023. As early as November last year, Huaxia Fund (Hong Kong) announced a memorandum of cooperation with HashKey Exchange and the physical asset tokenization company Hamsa to explore Web3 innovation in Hong Kong's asset management industry. On April 10, Huaxia Fund (Hong Kong) obtained Virtual Asset License No. 9.

Bosera Fund (International) is the overseas subsidiary of Bosera Fund, one of the first five fund management companies established in mainland China. As of December 31, 2023, Bosera Fund manages approximately $200 billion in assets. On April 6 of this year, Bosera International signed a strategic cooperation agreement with HashKey Capital, and the two parties will collaborate in multiple areas, including virtual asset spot ETFs, blockchain technology, and financial technology. On April 15, Bosera Fund (International) obtained Virtual Asset License No. 9.

In addition to the first batch of issuers, several leading fund companies are also positioning themselves for Bitcoin ETFs.

OSL is a local asset management group in Hong Kong, established in 1993, managing assets of $5.4 billion. At the end of last year, OSL revealed that it was considering issuing ETFs related to virtual assets and tokens. On January 22 of this year, OSL officially announced a strategic cooperation with VSFG to develop a spot Bitcoin ETF. VSFG's chairman, Zhu Chengyu, also publicly stated at the same time that they were preparing to submit an application for a virtual asset spot ETF, initially hoping to reach an asset under management (AUM) of $50 million (approximately HKD 390 million) by the end of this year.

Southern Fund's Hong Kong subsidiary, Southern Dongying Asset Management Co., Ltd., has also been making arrangements. As early as December 16, 2022, Southern Dongying listed Asia's first cryptocurrency ETFs on the Hong Kong Stock Exchange—the Southern Dongying Bitcoin Futures ETF and the Southern Dongying Ethereum Futures ETF. In addition, over 20 related institutions, including Victory Securities, have begun to venture into spot ETFs.

According to Emma Zhu, a partner at New Fire Asset Management (Hong Kong) Co., Ltd., New Fire Asset Management is currently in close communication with various brokers in the market to promote the signing of various MOUs, and more cooperation details will be announced soon.

ETF Custody Services Become a New Track

With the first batch of Hong Kong virtual asset spot ETFs passing the review, more funds are queuing to enter the market. However, there are special requirements for issuing virtual asset ETFs in Hong Kong.

Financial intermediaries and banks need to collaborate with licensed peers from the virtual asset sector and provide virtual asset trading services to clients under relevant regulatory conditions. The licensing process for virtual asset trading in Hong Kong is already very strict, and under the current system, only OSL Digital Securities Limited and Hash Blockchain Limited have received approval from the SFC.

According to Tony Luk, the investment director at New Fire Asset Management, applying for an ETF in Hong Kong requires finding large institutions for custody and then finding two SFC-recognized virtual asset trading platforms in Hong Kong for sub-custody. The general process for ETF applications is: first, select a reliable fund management company with a Type 9 license, ETF issuance experience, and virtual asset industry experience as the fund initiator and manager—then appoint accountants, lawyers, and other intermediaries—prepare the fund's articles of association and prospectus—apply to the SFC for fund recognition and listing—issue and list after SFC approval.

Therefore, ETF issuers need to collaborate with professional and compliant custody institutions. In the U.S., for example, in the Bitcoin ETF custody service sector, the cryptocurrency exchange Coinbase has maintained a dominant position, serving as the custodian for eight of the eleven ETF issuers, including BlackRock, Franklin Templeton, and WisdomTree, holding about 90% of the $37 billion in Bitcoin spot ETF assets. Since the ETF's launch, Coinbase's retail and institutional products have consistently seen net inflows.

After the approval of virtual asset ETFs in Hong Kong, custodians are facing new market demands, and custody services may become a track providing critical infrastructure, bringing new growth points for institutions like OSL, HashKey, New Fire Asset Management, and VSFG.

OSL

This time, the ETFs issued by Huaxia Fund (Hong Kong) and Harvest Global Investments were deployed through cooperation with OSL Digital Securities Limited. OSL Digital Securities Limited's parent company, OSL Group (formerly BC Group), was the first company to obtain Type 1 and Type 7 digital asset licenses issued by the Hong Kong Securities and Futures Commission, providing brokerage, custody, exchange, and software as a service (SaaS) to institutional clients and professional investors. Currently, only OSL and HashKey Exchange have obtained virtual asset exchange licenses in Hong Kong. OSL Digital Securities Limited has already obtained the first, fourth, and ninth types of asset management licenses from the SFC. According to OSL's official website, it has become the "first" virtual asset trading platform and custodian for these two funds.

HashKey Capital

HashKey Capital is jointly applying for the ETF with Bosera Fund (International), with HashKey fully participating as the custodian. On March 21, HashKey publicly announced its full support for the Hong Kong Bitcoin spot ETF. On April 12, HashKey Exchange's CEO, Weng Xiaoqi, stated in an interview that the fund issuers cooperating with HashKey had finalized the development of the Bitcoin spot ETF. HashKey will provide infrastructure support for the ETF and has entered the "integration and functionality testing" phase.

According to Jupiter Zheng, a partner in secondary funds and research at HashKey Capital, after the SFC issued a related circular on December 22, 2023, HashKey Capital began actively preparing for license and product applications. In terms of licensing, Bosera International needs to apply for VA qualifications, while HashKey Capital Limited needs to apply for public offering qualifications. The qualification application will then be followed by specific product applications.

HashKey Capital is a global asset management institution under HashKey Group, focusing on blockchain technology and digital assets, currently managing assets exceeding $1 billion. Recently, HashKey Capital Limited has received approval from the SFC to upgrade its Type 9 license (which allows for investment and management of 100% virtual assets), enabling it to provide virtual asset fund product services to retail investors. HashKey Exchange's specific work in cooperation with virtual asset ETF issuers mainly involves custody and trading.

New Fire Asset Management

According to Emma Zhu, a partner at New Fire Asset Management (Hong Kong) Co., Ltd., New Fire Asset Management is currently in discussions with several mainstream asset management companies that issue ETFs in the market, planning more arrangements and layouts to bridge the product structure between the cryptocurrency and traditional asset sectors.

New Fire Asset Management is a wholly-owned subsidiary of New Fire Technology, holding Type 4 and Type 9 licenses from the Hong Kong Securities and Futures Commission (SFC). New Fire Asset Management provides virtual asset fund services such as Bitcoin funds/Ethereum funds and other virtual asset allocation consulting. It is reported that New Fire Asset Management is the first licensed institution in the Hong Kong market to provide full discretionary account management services for virtual assets, with one of the longest historical performance compliant funds in the Hong Kong market, having over three years of historical performance. It has established and issued a total of six primary and secondary compliant funds, which can help issuers operate compliant funds and provide investment strategies.

VSFG

Currently, OSL is collaborating with VSFG to apply for a virtual asset spot ETF. As early as January 21 of this year, VSFG's chairman, Zhu Chengyu, publicly revealed that VSFG was preparing to submit an ETF application.

VSFG includes VSFG Capital Asia (VSFG Asia) and VSFG Asset Management Limited (VSFG Asset Management), both licensed corporations approved by the SFC to conduct regulated activities under Type 1 (securities trading), Type 4 (providing advice on securities), and Type 9 (providing asset management).

It is reported that VSFG is Hong Kong's first digital asset manager, launching the first regulated Bitcoin fund in Hong Kong in June 2020. In 2020, VSFG's subsidiary, VSFG Capital Asia Limited, became the first digital asset manager approved by the SFC in Hong Kong, capable of managing a portfolio with up to 100% of cryptocurrency assets.

What Impact Will ETF Approval Have? Can Mainland Investors Participate?

After the first batch of Bitcoin spot ETFs is approved, the Hong Kong Stock Exchange will need about two weeks to prepare for product listing and other matters, with the latest being by the end of April, when Bitcoin spot ETFs will be available in Hong Kong. If successfully issued, this will also become one of the first Bitcoin and Ethereum spot ETFs in Asia, meaning that global investors can first enter the world of virtual assets in a regulated environment within the Asian time zone.

Earlier this year, the U.S. SEC approved 11 spot Bitcoin ETFs, and as of the 10th of this month, the trading volume of related Bitcoin spot ETFs has exceeded $200 billion. So, how much traffic will the Bitcoin ETFs listed in Hong Kong bring? Can mainland investors participate?

Matrixport previously predicted in a report that the Bitcoin ETFs listed in Hong Kong could release demand of up to $25 billion. The report suggests that as mainland investors utilize the southbound trading scheme, if the Bitcoin spot ETFs listed in Hong Kong are approved, up to $25 billion could flow from mainland China.

However, in fact, the sale of virtual asset-related products must comply with the requirements of the relevant jurisdictions, so the virtual asset spot ETFs are prohibited from being sold to mainland investors. Furthermore, legal entities or individuals in mainland China are not allowed to directly or indirectly purchase Bitcoin ETFs without first obtaining all necessary government approvals from mainland China. Theoretically, only qualified investors in Hong Kong can purchase them, and mainland users who are not qualified investors in Hong Kong still cannot buy them.

$25 billion does seem a bit exaggerated; according to several analysts, the expected fund inflow scale for the Hong Kong ETF is about $500 million to $1 billion.

Bloomberg ETF analyst Eric Balchunas posted on social media last night, estimating that the inflow scale could be $500 million for the following reasons: the Hong Kong ETF market is small, only $50 billion; the three approved spot Bitcoin ETF issuers (Bosera, Huaxia, Harvest) are relatively small; there are currently no large institutions like BlackRock involved; the liquidity/efficiency of the underlying ecosystem is low; and trading fees may be 1-2%, which is relatively high compared to U.S. spot Bitcoin ETFs.

Jupiter Zheng, a partner in secondary funds and research at HashKey Capital, told ChainCatcher, "We expect an initial inflow of $500 million for the product. By the end of the year, it could reach at least $1 billion. We believe that both products will receive positive subscriptions from clients, reaching not only traditional finance but also covering Web3-native institutions and large investors. The team is currently working hard to expand its client base, including traditional institutions, family offices, high-net-worth individuals, and digital asset-native users."

New Fire Asset Management's investment director Tony Luk also estimated in an interview with ChainCatcher that the initial asset scale of the Hong Kong virtual asset spot ETF would be around $1 billion. The main reasons are the small scale of the Hong Kong ETF market, insufficient liquidity in the trading system, and high trading fees. Compared to the U.S. ETF market, Hong Kong's virtual asset ETFs face more challenges. Tony Luk also stated, "I believe that as time goes on and market mechanisms improve, the Hong Kong Bitcoin ETF will attract more funds into the market, serving as a channel for institutional investors to enter the Bitcoin market. We expect the asset scale flowing into the Hong Kong virtual asset spot ETF to be between $1 billion and $2 billion."

In addition, he mentioned that institutional investors currently have a strong interest in the Hong Kong virtual asset spot ETF and are expected to allocate some funds. Although there are still restrictions on mainland investors directly purchasing Hong Kong virtual asset ETFs, with regulatory policies gradually opening up, the possibility of direct investment in the future cannot be ruled out. It is expected that mechanisms similar to the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect will emerge, allowing mainland investors to invest in Hong Kong's virtual asset ETFs through these channels, just as mainland investors currently invest in Hong Kong stocks.