Following the HK SFC’s approval, several offshore Chinese asset managers — including Bosera Asset Management, Harvest Global Investments and China Asset Management — are set to launch their spot digital asset ETFs. This regulatory development, riding the tailwind of digital asset ETF developments in the US, will potentially accelerate greater adoption of digital assets in the APAC region. It potentially grants investors direct access through specified brokers, eliminating the need to buy through specialized crypto exchanges and to manage self-custody, instead utilizing regulated entities for the needed safekeeping.
Hong Kong has now knowingly set a precedent for other Asian markets, many of which have been still cautious thus far. Over the past year, Hong Kong has doubled down its efforts to drive digital asset innovation while trying to enhance its regulatory framework. This progressive approach is expected to ripple across APAC markets, including Singapore, Korea, and Japan, by drawing significant capital inflows and investments. With a combined ETF assets under management (AUM) in the APAC region said to be totaling $1.2 trillion, the APAC region presents sizable opportunities that can be further unlocked through the introduction of digital asset ETFs.
Institutional involvement
Historically, the broader adoption of digital assets like Bitcoin has been hindered by traditional finance (TradFi) players’ reluctance to venture beyond their conventional investment portfolios due to complexities in acquiring, securing, managing, and transferring Bitcoin, along with regulatory uncertainties.
However, a transformative shift now seems underway, propelled by the entry of TradFi behemoths, including Blackrock and Fidelity, whose filing for a spot bitcoin ETF triggered a bullish surge in bitcoin prices. Approval of spot Bitcoin ETF applications from 11 issuers in January 2024 not only facilitates investors’ access to Bitcoin without the need for direct management but also signals a new juncture for the market. The foray of TradFi players into digital assets underscores a well-trodden narrative: the imperative for market participants to engage fueled by irresistible FOMO.
The trend now echoes in Hong Kong as institutional participation gathers pace. Notably, the three asset managers granted spot digital asset ETF approval are among Greater China’s largest, with a combined AUM exceeding USD $700 billion. The increased involvement of such large major institutional players is widely expected to prompt others to follow and incorporate digital assets into their portfolios.
Innovation At The Forefront
Hong Kong’s recent move also showcases innovative practices. It took a step further than its US counterparts by becoming the first jurisdiction to approve spot Ether ETFs. By opening access to regulated and secure investment products tracking the price of Ether, Hong Kong’s decision can potentially channel substantial investments into the world’s second-largest cryptocurrency. With Ether’s market value at around USD $385 billion and a market share of about 16% in the cryptocurrency market, this move could unlock further institutional participation and access, while the US SEC’s current stance is still unclear on ETH ETFs.
Notably, the launch of spot Bitcoin and Ether ETFs in Hong Kong has been said to allow for in-kind creation, as opposed to just the cash-create model favored by US authorities. ETF issuers can exchange the fund’s underlying assets (e.g. Bitcoin and Ether) directly with the broker dealer for ETF unit creation and redemption. As highlighted by some asset managers, the use of cash creations and redemptions, together with the in-kind model, may cause problems in keeping share prices aligned with Bitcoin’s Net Asset Value (NAV) in some situations.
Currently, Asia-based investors eyeing US BTC ETFs encounter hurdles like currency conversion requirements, as these ETFs exclusively accept USD for subscriptions, along with the inconvenience of trading across different time zones. Hence, if digital asset ETFs in Hong Kong offer advantages like multi-currency subscription options and allow trading in Asia time zones, these features will streamline access to digital assets and unlock vast investment opportunities for investors based in Asia. With these HK spot ETFs potentially paving the way for additional digital asset investment products unavailable elsewhere, it’s interesting to see how Hong Kong’s decision influences the US’s stance on digital asset ETFs and regulators in other jurisdictions.
Potential Chinese Investment
To fully grasp the implications of HK’s ETF approval, one must consider its impact on mainland China investors. If access is granted to Chinese mainland investors, many of whom are actively seeking alternative havens to store their wealth alongside gold and overseas assets, it could substantially impact the influx of investment into these ETFs, keeping in mind the scale of Mainland China’s ETF AUM is nearly six times that of Hong Kong.
Not all are optimistic about digital asset spot ETFs in Hong Kong. Senior Bloomberg ETF analyst Eric Balchunas noted that Chinese retail investors may lack access. Given that the Stock Connect program — typically used by mainland Chinese investors to access eligible shares listed on the Hong Kong Stock Exchange — still excludes them from digital asset ETFs, this potentially questions and casts doubt on the prospects of spot counterparts in Hong Kong. However, this doesn’t necessarily diminish the significance of Hong Kong’s ETF approval. While the market awaits clarity on access for mainland Chinese investors, developments in Hong Kong indicate a growing acceptance of digital assets as a legitimate asset class and governments’ proactive exploration of their use cases, marking a significant step forward. Hong Kong sets a commendable example by championing innovation, which is likely to reverberate across Asia’s financial ecosystem.
Johnson Chen further commented, “As we stand on the brink of a new financial era, the combination of TradFi via ETFs with digital underlying assets (instruments like Bitcoin and Ether, also affectionately bundled together and conveniently known as Web3) illustrates the convergence of two worlds. These developments exemplify how innovation, embraced by regulatory bodies and market leaders, can lay the groundwork for a more inclusive and dynamic financial future.”
Disclosures: The author of this opinion article does not hold any positions in the ETFs mentioned.
