Why Hong Kong is Primed for a Crypto ETF Breakthrough

Why Hong Kong is Primed for a Crypto ETF Breakthrough

by May 9, 2024

In the dynamic landscape of global finance, Hong Kong has emerged as a frontrunner in innovative exchange-traded funds (ETFs).

As investors increasingly seek to diversify their portfolios and capitalise on emerging trends, Hong Kong ETFs have captured the financial world’s attention, particularly in the cutting-edge sectors of crypto, blockchain, and metaverse.

Hong Kong’s ascent to becoming a leader in innovative ETFs can be attributed to its proactive approach to digital assets and its commitment to cultivating a conducive environment for fintech innovation.

The city’s embrace of cryptocurrencies and blockchain technology, seamlessly integrating them into its financial ecosystem, has garnered global recognition and established Hong Kong as a vital bridge between traditional finance and the rapidly evolving digital asset space.

As Hong Kong continues to cement its position as a global financial hub, the city’s embrace of active ETFs and its proactive approach to integrating digital assets into its financial ecosystem have set the stage for a new era of innovation and growth.

Hong Kong’s Active ETF Ecosystem

Hong Kong has established itself as a hub for active ETFs, with the city’s ETF market offering a diverse range of products across various sectors.

From money markets and virtual assets to technology and ESG investments, Hong Kong’s active ETFs cater to various investor preferences and risk appetites.

The growth of the active ETF ecosystem in Hong Kong is evident from the significant increase in their contribution to the average daily turnover of the city’s ETF market, which rose by 214 percent from 2022 to HK$16.2 million in 2023.

One notable trend in Hong Kong’s active ETF market is the surge in listings of active money market ETFs, as issuers aim to meet the growing demand from yield-seeking investors.

In 2023, four of the five active ETFs listed in Hong Kong were money market ETFs, collectively contributing HK$6.3 million to the city’s average daily turnover of ETFs.

By the end of 2023, there were 24 active ETFs listed on HKEX, with a total market capitalisation of HK$8.6 billion (approximately $1 billion).

This trend highlights the increasing importance of active management in the fixed-income space as investors seek to navigate the challenges posed by a low-yield environment and rising interest rates.

Crypto derivatives, blockchain ETFs and the Metaverse

Hong Kong’s active integration of digital assets into its financial ecosystem has significantly propelled the city’s emergence in crypto and blockchain ETFs.

The city embraced crypto derivatives with the launch of the CSOP Bitcoin Futures ETF (3066) and CSOP Ether Futures ETF (3068) in 2022, followed by the Samsung Bitcoin Futures Active ETF (3135) in 2023.

In addition to this, the city welcomed blockchain technology-focused investment products, such as the Global X Blockchain ETF (2840) in 2021 and the Samsung Blockchain Technologies ETF (3171) in late 2023.

Hong Kong Crypto ETF

Hong Kong’s ETF market has also adopted the metaverse theme, with the launch of Hong Kong’s first Metaverse ETF, the CSOP Metaverse Concept ETF, which began trading on February 21, 2022, Global X Metaverse Theme Active ETF (3006) and the NikkoAM Metaverse Theme Active ETF (3091/9091) in 2022.

This was followed by the Samsung Asia Pacific ex NZ Metaverse Theme ETF (3172) in early 2023. As interest in the metaverse grows, more metaverse-focused ETFs are expected to be launched in Hong Kong.

Hong Kong ushers in Spot Crypto ETFs

On April 15, 2024, Hong Kong granted initial approvals s to three Chinese asset managers – Harvest Global Investments Ltd., Bosera Asset Management (International) Co. Ltd., and China Asset Management (Hong Kong) Ltd. – to launch exchange-traded funds (ETFs) backed by spot virtual assets such as Bitcoin and Ether, paving the way for the city to become Asia’s first to accept cryptocurrencies.

This move allows investors to have regulated exposure to these virtual assets through the ETFs, setting the stage for Hong Kong to attract global fintech innovation and solidify its reputation as a leader in the digital asset space.

The approval process included rigorous conditions set by the Securities and Futures Commission (SFC), ensuring that the ETFs meet the high standards required for operation within Hong Kong’s financial system.

On Tuesday, April 30, 2024, the six newly launched spot bitcoin and ether ETFs — one bitcoin and one ether ETF from each issuer — began trading and saw a combined volume of US$11.2 million (HK$87.5 million), according to data from the Hong Kong Stock Exchange.

Among them, China AMC’s bitcoin ETF announced that it launched with an initial value of HK$950 million, marking the largest debut among the three issuers.

The Bosera HashKey Bitcoin and HashKey Ether ETFs introduce a unique ‘in-kind’ subscription mechanism that allows for direct subscription and redemption using Bitcoin and Ethereum, respectively. This method provides a flexible and straightforward investment process for digital asset enthusiasts and investors.

These ETFs are designed to track the CME CF Bitcoin Reference Rate – Asia Pacific Variant and the CME CF Ether-Dollar Reference Rate – Asia Pacific Variant, respectively. They aim to provide reliable benchmarks for pricing the respective cryptocurrencies.

Hong Kong Crypto ETF

Christina Choi

Christina Choi, an executive director at the Securities and Futures Commission (SFC), celebrated the ETF’s introduction as a significant development in Hong Kong’s ETF market but cautioned about potential risks.

“Virtual assets are highly speculative and extremely volatile… therefore, I advise that such assets may not be appropriate for all investors,”

Christina stated at the launch event on Tuesday.

Han TongliHong Kong ETFs

Han Tongli

Han Tongli, CEO and CIO of Harvest Global Investments highlighted the significance of this initiative, stating that it not only meets investors’ demands for high-growth assets but also allows them to participate in the rapidly evolving opportunities in blockchain and digital assets.

The introduction of the ETF positions Hong Kong as a direct competitor to the United States for crypto investors.

HashKey Group predicts that Hong Kong’s spot crypto ETF market could grow to 20 percent of the size of its United States equivalent within a year.

Deng ChaoHong Kong Crypto ETF

Deng Chao

Deng Chao, CEO of HashKey Capital, commented,

“The launch of these ETFs represents a significant milestone in broadening the access to cryptocurrencies, making them a more tangible part of the investment landscape.”

This regulatory oversight instills confidence in investors and demonstrates Hong Kong’s commitment to fostering a secure and reliable environment for digital asset investments.

However, despite close ties between ETF issuers and China, Chinese citizens are likely to be barred from purchasing Hong Kong’s spot crypto ETFs due to the country’s restrictive policies on cryptocurrencies.

Opportunities abound for investors and ETF issuers

The burgeoning crypto, blockchain, and metaverse ETF landscape in Hong Kong presents a wealth of opportunities for both investors and ETF issuers. 

Investors can access a diverse range of innovative products, while issuers can capitalise on the growing demand by developing new offerings that cater to investors’ evolving needs and preferences. 

Hong Kong’s supportive regulatory environment and robust infrastructure provide a solid foundation for the growth and success of these cutting-edge ETFs.

Image: Bloomberg

Among the three spot crypto ETF issuers in Hong Kong, China AMC – the Hong Kong subsidiary of China Asset Management – stands out as the largest player, with 15 ETFs and total assets under management of US$3.6 billion (HK$28.14 billion).

Bosera and Harvest, the other two issuers, manage US$40 million (HK$312 million) and US$16 million (HK$125 mllion) in AUM, respectively.

Industry experts, such as Bloomberg Intelligence’s Rebecca Sin estimates the city’s Bitcoin and Ether funds may amass US$1 billion (HK$7.82 billion) over two years, given a bullish market scenario.

Hong Kong’s unique advantages in the Spot Crypto ETF market

Hong Kong’s Spot Crypto ETF market is valued at approximately US$50 billion (HK$390 billion), making it 168 times smaller than that of the United States. Despite this, Hong Kong’s spot crypto ETFs offer a distinct advantage in their redemption method.

In contrast to American spot crypto ETFs, which are currently limited to cash creations, Hong Kong’s spot crypto ETFs allow for in-kind creations.

This means that ETF intermediaries use actual cryptocurrencies, such as Bitcoin, to provide funds to issuers when creating new ETF shares.

This unique feature sets Hong Kong apart and underscores its commitment to innovation in the digital asset space.

In a YouTube interview, Bloomberg Intelligence analyst James Seyffart pointed out that the ETF markets in Hong Kong and the US are not directly comparable due to size differences.

“On an absolute basis, comparing this to US launches isn’t feasible. However, on a relative basis, these were very successful for the Hong Kong market,”

James explained.

The future of investing in the digital age 

As the adoption of digital assets and the metaverse development continue to accelerate, Hong Kong’s ETF market is poised to play a crucial role in shaping the future of investing in these spaces.

By offering investors a diverse range of products that provide exposure to the most exciting and transformative themes of our time, Hong Kong is cementing its position as a leader in the global ETF landscape.

Looking ahead, the growth of crypto, blockchain, and metaverse ETFs in Hong Kong will likely attract increasing attention from local and international investors.

As more individuals and institutions seek exposure to these innovative themes, the demand for high-quality, well-regulated investment products will continue to rise.

To capitalise on this opportunity, ETF issuers must remain agile and adaptable, staying abreast of the latest digital asset and metaverse developments.

By continually innovating and launching products that meet the evolving needs of investors, issuers can help drive the growth and maturation of Hong Kong’s ETF market.

Featured image credit: Edited from Freepik