Hong Kong to launch first spot crypto ETFs by mid-2024

Hong Kong is gearing up to launch its first spot crypto exchange-traded funds (ETFs) by mid-2024, a move that could redefine the landscape of digital asset investment in the region, according to Jan. 22 news reports.

Spot crypto ETFs are funds that track the price of cryptocurrencies such as Bitcoin and Ethereum in real time, allowing investors to gain exposure to the volatile but lucrative market without having to buy or store the underlying assets.

The Hong Kong Securities and Futures Commission (SFC) is currently accepting applications for issuing spot crypto ETFs, although none have been approved yet. However, some issuers are actively preparing to submit their proposals.

One of them is VSFG, a financial services firm that specializes in digital asset management. VSFG’s chairman, Zhu Chengyu, revealed that he has reached a cooperation agreement with a local fund company and is ready to apply for a spot crypto ETF. He hopes to submit the application before the Lunar New Year and launch the product in the first quarter of 2024. He also expects the assets under management (AUM) to reach $500 million (about HK$3.9 billion) by the end of the year.

Zhu said that VSFG’s spot crypto ETF will target the Asian time zone, as opposed to the US market, which has already approved 11 spot Bitcoin ETFs from well-known fund giants such as BlackRock and Fidelity. He said that there is a lot of demand for spot crypto ETFs in Asia, especially from institutional investors in mainland China, South Korea, Japan and Taiwan. He believes that more fund companies will be interested in issuing spot crypto ETFs in Hong Kong.

However, the industry also faces some challenges in launching spot crypto ETFs, as the SFC has strict requirements for the custody of virtual assets. According to a circular issued by the SFC, the custodian of a spot crypto ETF must be either a licensed virtual asset trading platform or a bank that complies with the standards for virtual asset custody issued by the Hong Kong Monetary Authority (HKMA).

According to sources, the HKMA has completed the industry consultation on the guidelines for providing virtual asset custody services and is reviewing the feedback before proceeding to the next step. This means that, for now, only the two local licensed virtual asset trading platforms can provide custody services for spot crypto ETFs.

One of them is HashKey Group, a digital asset platform that offers trading, custody, asset management and blockchain solutions. HashKey’s chief operating officer, Ong Xiaoqi, said that more than 10 fund companies are actively preparing to launch spot crypto ETFs in Hong Kong, and seven to eight of them have entered the actual implementation stage. He said that HashKey is in close cooperation with several spot crypto ETF applicants and aims to launch the products as soon as possible in the next few months. He said that these funds will need to choose a licensed trading platform to perform the custody, trading and settlement of the underlying assets. HashKey may also introduce a shared governance agreement to help the fund side operate.

Another licensed virtual asset platform is OSL, a digital asset brokerage and exchange that offers institutional-grade services. OSL’s executive director and head of regulatory affairs, Diao Jiajun, said that he is in close communication with many fund companies and that there are five to 10 fund companies conducting research work. He said that up to five of them can advance faster and are expected to launch the first spot crypto ETF by mid-2024. He admitted that having only two licensed virtual asset platforms in the market puts pressure on ensuring that the fees are not too high, as the US market has set an objective benchmark and the Hong Kong market is highly transparent.

Currently, Hong Kong has three virtual currency futures ETFs, including the Samsung Asset Management (Hong Kong) Bitcoin Futures ETF (03066) and the Samsung Asset Management (Hong Kong) Ethereum Futures ETF (03068). The existing issuers are not very enthusiastic about spot crypto ETFs.

Wang Zhuofeng, managing director and head of sales (Asia Pacific) of Samsung Asset Management (Hong Kong), said that using futures to operate ETFs is simpler and can avoid systemic risks. He said that using spot to operate ETFs involves higher risk management and dependence on custody and counterparty. He said that his company already has two existing products and that launching another similar product is not very cost-effective. He said that he will observe the market demand before making a decision.

Xiao Peiling, ETF investment strategist of Samsung Asset Management (Hong Kong), said that she already has futures-related products and is interested in spot products. She did not rule out launching them, but she has no updates for now. She explained that many banks have not distributed virtual asset futures ETFs, and even if they launch spot ETFs, they may face similar problems.

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