The first batch of 6 virtual asset ETFs in Hong Kong has been approved! Physical subscription and redemption is expected to open up a compliant "withdrawal" channel for cryptocurrencies

Author: Weilin, PANews

The regulatory approval for Bitcoin and Ethereum spot ETFs in Hong Kong has officially landed.

On the evening of April 24, the Hong Kong Securities and Futures Commission (SFC) listed the Bitcoin and Ethereum spot ETFs from three fund companies: Huaxia Fund (Hong Kong), Bosera International, and Harvest Global Investments, with recognition dates all set for April 23, 2024. The three institutions also officially announced at the same time that they have received SFC approval and expect to be officially listed on the exchange on April 30.

This is the first time such products have been launched in the Asian market, aimed at providing investment returns closely tied to the spot prices of Bitcoin and Ethereum. Virtual asset spot ETFs lower the investment threshold and risk. Professional fund management has strict investment processes and risk management mechanisms. ETF products can be traded on mainstream stock exchanges, reducing operational difficulty and risk. Additionally, ETF products offer a physical redemption mechanism, allowing investors to indirectly hold Bitcoin by holding ETF shares without worrying about the storage and security of Bitcoin.

Currently, these ETF products can be subscribed to in cash or with cryptocurrency, but relevant accounts must be opened in Hong Kong to operate. According to Caixin reports, based on a joint circular issued by the SFC and the Hong Kong Monetary Authority in December 2023, neither the existing virtual asset futures ETFs in the Hong Kong market nor the future-issued virtual asset spot ETFs can be sold to retail investors in mainland China, where the sale of virtual asset-related products is prohibited. However, mainland individuals holding Hong Kong identity cards, even if not permanent residents, can participate in the trading of the aforementioned ETFs under compliant conditions.

Intense Competition in Management Fees for 6 ETFs

Harvest Global Investments is the first fund to submit a Bitcoin spot ETF in Hong Kong. According to Tencent Finance's "Frontline," the SFC urgently updated the list of virtual asset management funds in the early hours of April 10, originally planning to approve a total of 4 Bitcoin spot ETFs in the first batch, including Harvest Global Investments, Huaxia Fund, and Bosera Fund, along with Haitong Financial. However, the currently published list does not include Haitong Financial.

The application process for several fund companies appeared somewhat rushed. Some applicants for Bitcoin spot ETFs, including Huaxia Fund, formed teams just over a month ago and submitted their applications in the second week of March. Two weeks later, Huaxia Fund received approval from the SFC. The submission of Bitcoin spot ETFs in Hong Kong requires collaboration with at least 20 partner institutions, including Bitcoin custodians and market makers, as well as institutions holding comprehensive virtual asset trading accounts.

In terms of supported currencies, the ETFs issued by Bosera International and Harvest Global Investments have both HKD and USD counters, while the two ETFs issued by Huaxia Fund (Hong Kong) have HKD, USD, and an additional RMB counter, issuing simultaneously in three currencies.

Similar to the fee wars during the launch of Bitcoin spot ETFs in the U.S., the competition among these three fund companies in management fees is also fierce. Harvest Global Investments offers a management fee waiver for the first 6 months, while Bosera International waives management fees for the first 4 months after issuance. According to Bloomberg analyst Eric Balchunas, the management fees for the three fund companies are 30 basis points (Harvest Global Investments), 60 basis points (Bosera International), and 99 basis points (Huaxia Fund), averaging lower than expected. Previously, he had anticipated that the fees for these ETFs could be between 1-2%. ETF analyst James Seyffart stated that Hong Kong might see a potential fee war due to these Bitcoin and Ethereum ETFs.

Currently, the fees for the 11 approved Bitcoin ETFs in the U.S. range from 0.19% to 1.5%. Fidelity's Fidelity Wise Origin Bitcoin Trust (FBTC) has a fee of 0.25%, with the fee waiver lasting until July 31, 2024. BlackRock's iShares Bitcoin Trust also has a fee of 0.25%, with 0.12% for the first 12 months (or until assets reach $5 billion). The ARK 21Shares Bitcoin ETF (ARK B) has a fee of 0.21%, with 0% for the first six months (or until assets reach $1 billion). Grayscale's Grayscale Bitcoin Trust (GBTC) has the highest fee at 1.5%.

The approval of Bitcoin spot ETFs in Hong Kong comes about three months after the U.S. Securities and Exchange Commission approved the first batch of U.S. Bitcoin spot ETFs on January 11. According to Bloomberg data, U.S. Bitcoin ETFs have accumulated $56 billion in assets so far.

Physical Redemption ETFs Will Open Compliant "Withdrawal" Channels

In Hong Kong, virtual asset spot ETFs can be traded using either a cash model or an in-kind model. For cash redemptions, funds must obtain virtual assets on a licensed exchange in Hong Kong, which can be through on-exchange or off-exchange transactions; for in-kind redemptions, virtual assets must be transferred in or out of the fund's custody account through brokers.

In contrast to the U.S. Securities and Exchange Commission's model, which only allows cash redemption for spot Bitcoin ETFs to reduce the number of intermediaries and increase controllability, allowing for in-kind subscriptions and redemptions means that clients can buy or sell ETF shares using the relevant cryptocurrencies instead of using USD.

Analysts point out that physical redemption ETFs will open compliant "withdrawal" channels for Bitcoin and Ethereum. Especially for institutions and high-net-worth investors, converting Bitcoin into a near-fixed proportion of ETFs can effectively avoid potential freezing issues when "withdrawing" through exchanges; it can also reduce security risks associated with wallet and private key management, further protecting their asset safety.

Previously, the potential scale of funds attracted by Hong Kong's Bitcoin and Ethereum spot ETFs had sparked heated discussions. On April 15, Bloomberg senior ETF analyst Eric Balchunas stated on platform X: "We think if they (ETF issuers) can attract $500 million in funds, they would be very lucky. The reasons are as follows: 1. The Hong Kong ETF market is very small, only $50 billion, and mainland Chinese residents cannot purchase these ETFs through official channels. 2. The three approved issuers (Bosera Fund, Huaxia Fund, Harvest Fund) are all relatively small. Currently, there are no large institutions like BlackRock involved. 3. The liquidity and efficiency of Hong Kong's underlying ecosystem are insufficient, so these ETFs may see significant price spreads and premium discounts. 4. The fees for these ETFs may be between 1-2%. This is far from the extremely low fees in the U.S."

Nevertheless, the approval of Bitcoin ETFs in Hong Kong could represent a significant market opportunity. Bloomberg ETF analyst Eric Balchunas noted in another research note that "this opportunity could significantly increase the assets under management (AUM) and trading volume of Bitcoin ETFs in the region."

Herbert Sim, COO of cryptocurrency exchange Websea, also previously stated that the approval of Hong Kong's first spot Bitcoin ETF would increase demand and capital inflow from large U.S. ETF issuers like BlackRock, and he expects this trend to continue. He stated, "As Bitcoin's halving reduces supply, prices will definitely soar."

According to cryptocurrency commentator Bitcoin Munger's post on April 12, prior to the approval, large investors or whales holding at least 10,000 BTC were accumulating Bitcoin at current price levels in anticipation of the approval of Hong Kong's virtual asset ETFs. "The group accumulating Bitcoin net is the largest whales (>10k). If I had to guess, this is a positive contrarian signal."