Jessy, Golden Finance
Harvest Global, China Asset Management (Hong Kong), and Bosera International's approved Bitcoin spot ETF and Ethereum spot ETF will be launched at the end of the month. This is of great significance to Hong Kong. Hong Kong dares to be the first. This is the first approved virtual currency spot ETF in Asia, and not only the Bitcoin spot ETF has been approved, but also ahead of the approval process of the Ethereum spot ETF in the United States.
Previously, Hong Kong had launched Bitcoin and Ethereum futures ETFs, and some asset management companies have also tried virtual asset-related funds. On December 22, 2023, the Hong Kong Securities and Futures Commission issued a circular on the approval of funds by the Securities and Futures Commission to invest in virtual assets, which stated that the regulator is ready to accept applications for approval of other funds involving virtual assets, including virtual currency spot ETFs.
Within less than four months after the circular was issued, three companies' products were approved. How did this efficiency come about? What does the launch of virtual currency spot ETFs mean for traditional finance in Hong Kong? What details of virtual currency spot ETFs are worth investors' attention?
Futures, funds, securities firms, asset management, traditional finance has already tried Web3
Before spot ETFs, Hong Kong has already made some attempts to combine virtual currencies with traditional financial markets.
In December 2022, CSOP Asset Management Co., Ltd. launched the first batch of virtual asset ETFs in Asia: CSOP Bitcoin Futures ETF (3066.HK) and CSOP Ethereum Futures ETF (3068.HK). And it was officially listed on the Hong Kong stock market in the same month. The sub-fund mainly invests in Bitcoin futures of the Chicago Mercantile Exchange (CME).
In terms of fund net value performance, the futures ETF product launched by Southern Asset Management's Hong Kong subsidiary Southern Asset Management - FA Bitcoin - has soared against the backdrop of poor profitability and low investor sentiment in the Hong Kong stock market in 2023. In 2023, the net value of FA Bitcoin increased by 1.34 times. Against the backdrop of a doubling of the fund's net value, the annual return of FA Bitcoin has exceeded 50% in the first four months of 2024.
And CSOP's Bitcoin Futures ETF is the one with the highest return rate among all ETFs in Hong Kong in 2023, with a scale of 35 million yuan, and is also the largest ETF.
In addition to high returns, the most critical indicator for the survival of ETF products is trading volume. The average daily trading volume of FA Bitcoin in the past month has remained around HK$30 million, which is already a considerable level of trading volume.
In addition to Southern East Asia, Samsung Bitcoin Futures Active ETF will also be launched in January 2023.
Many established brokerage firms have tried virtual currency-related businesses. VDX Chief Strategy Officer Paolo once revealed that previously, the monthly trading volume of virtual currency on Victory Securities reached 100 million yuan.
Some asset management companies from the currency circle have also made some attempts. For example, in 2021, New Fire Asset Management established Hong Kong's first compliant virtual currency fund with an active management strategy. Jessica Soong, deputy director of business development at New Fire Asset Management, told Golden Finance reporters that the virtual currency fund will have an annualized return of 55% in 2023.
Shrouded in the haze of the "sites of the international financial center", Hong Kong's traditional finance needs to find a breakthrough in business growth. For the currency circle, compliance and embracing mainstream finance have also become a main development line of the blockchain industry in recent years.
However, it is not an easy task for both traditional finance and native institutions in the currency circle to do virtual currency spot ETFs.
No experience to follow, win-win cooperation is needed
The root of the problem is that there is almost no experience to follow in this matter. From the government to the institutions, they need to practice and explore continuously.
The spot ETFs of three fund companies were approved this time, namely Harvest International, China Asset Management (Hong Kong), and Bosera International. These three institutions are all important big brothers in the traditional financial field.
Market insiders close to Harvest told Golden Finance reporters that two years ago, Harvest International established a virtual currency-related investment and research department, which was only involved in research at the time and had no specific business.
After the Hong Kong government issued the "Policy Declaration on the Development of Virtual Assets in Hong Kong" in October 2022, the virtual currency-related departments of Harvest International will no longer only conduct industry research, but will begin to communicate more with the regulatory authorities in Hong Kong, learn about the relevant policies, laws and regulations of other countries, and follow up on the policies and take action at any time.
Market insiders close to Harvest said that after the release of the "Policy Declaration on the Development of Virtual Assets in Hong Kong", Harvest International has been in contact with relevant regulatory authorities. At present, Harvest International is also planning Hong Kong stablecoin-related business.
Harvest International was the first to submit an application in January 2024 and became the first batch of approved institutions. The main reason for its success may be that it has been paying attention to and following up on the application of spot ETFs in European, Asian and American countries, and has rich experience in issuing ETFs.
Applicants need to submit a set of ETF issuance plans to the Securities and Futures Commission, such as how users subscribe, how to trade, and how to control risks, protect investors, and prevent money laundering.
There are two difficulties. One is how to design the plan, especially how to apply for and redeem. Most institutions will get stuck at this step. The other is where to find the service providers involved in the process.
Take the service provider as an example. Shengli Securities is currently the participating securities dealer (PD) of the three Bitcoin spot ETF issuers, and is also the only VA (virtual asset) ETF physical delivery securities dealer in the market.
The ETFs issued by China Asset Management (Hong Kong) and Harvest International are deployed through cooperation with OSL Digital Securities Co., Ltd. HashKey applied for ETFs together with Bosera Funds (International), and HashKey participated in it as a custodian.
Take Shengli Securities as an example. As the PD of the three ETF issuers, its role is to apply for, create and redeem ETF units in the product framework of the ETF.
At the same time, customers can directly subscribe to ETFs with cryptocurrencies through Victory Securities. Victory Securities is the only brokerage in Hong Kong that has achieved coin-in and coin-out, and this process does not require going through an exchange. At present, only a few brokerages have successfully upgraded their No. 1 license to virtual asset trading, and upgrading the No. 1 license is the first step to be able to provide this service.
Market insiders close to Harvest said that Harvest International is the first company in Hong Kong to run through the process of spot ETFs and the first company to submit an application to the Securities Regulatory Commission. China Asset Management and Bosera borrowed from Harvest's application. Harvest believes that this is a direct cooperation. After all, Hong Kong's compliant virtual currency business is now a blue ocean, and cooperation can make the cake bigger.
According to Hong Kong's qualifications for managers issuing spot ETFs, they are as follows: 1. Have a good regulatory compliance record; 2. Have at least one competent employee with experience in virtual asset and related product management; 3. Hold an upgraded No. 9 license.
Although there are as many as 2,000 asset management companies with Hong Kong's ninth-category license, only more than a dozen have upgraded to the ninth-category license.
In this case, cooperation can lead to win-win results. In the process of entering Web3, or more precisely, in the matter of spot ETFs, what we need to do more is to make the pie bigger together and then share the results.
The largest market is still in the mainland
It is worth noting that compared with the Bitcoin spot ETF in the United States, Hong Kong has an additional channel for subscribing to spot ETF shares on the exchange with virtual currency spot.
An anonymous Hong Kong securities industry practitioner told Golden Finance reporters that this is because Hong Kong has a licensed exchange that has opened up the channel. For people in the industry, this is also a compliant deposit and withdrawal channel.
Chen Peiquan, executive chairman of Victory Securities, believes that physical subscription does not need to wait for transactions between banks or dealers, because the original legal currency involves the action of buying VA for trading, and the closing time of physical transactions is longer than that of cash. Therefore, physical subscription can enjoy time advantages.
In recent years, the decline of Hong Kong stocks has basically not improved. As of the end of 2023, the total market value of Hong Kong stocks is about 31 trillion Hong Kong dollars. By 2023, Hong Kong stocks have fallen for four consecutive years. On the other hand, European and American funds have withdrawn and liquidity has shrunk. Even in 2023, Hong Kong was once ridiculed as the "relics of the international financial center."
Some people believe that Hong Kong stocks have entered a slow bear, and the reason is "soil deterioration." As Hong Kong gradually changes from an international financial center to an ordinary Chinese city, foreign capital will leave the Hong Kong financial market. A specific example of foreign capital withdrawal is that the main pension fund of the US federal government announced that it would exclude stock investments in China and Hong Kong from its $68 billion international fund.
Tony Luk, investment director of New Fire Asset Management, said that after the launch of the Bitcoin spot ETF, the daily inflow is expected to be around $10 million to $20 million. Considering the small scale of the Hong Kong ETF market and limited trading volume, large inflows will take some time, and the initial daily inflow will not be too large. The expected volume of spot ETFs is around $1 billion to $2 billion.
At present, the overall scale of Hong Kong ETFs is only $50 billion, and Bitcoin ETFs have restrictions such as high transaction costs. In this way, $2 billion is already a relatively high scale in the Hong Kong market.
At present, the scale of BlackRock's Bitcoin spot ETF alone has exceeded 10 billion US dollars. The United States itself accounts for more than 80% of the Bitcoin spot ETF market, ranking first, while Canada, which ranks second, only accounts for 7%, with a specific volume of about 3 billion US dollars. If Hong Kong can reach 2 billion US dollars, it will also rank high in the world. Although 2 billion is a drop in the bucket for the overall financial market in Hong Kong, embracing Web3 is a positive move by the government to revitalize Hong Kong's financial industry that deserves encouragement. Although residents of mainland China are currently not allowed to buy virtual currency spot ETFs. But it can be foreseen that after the continuous opening of policies, mainland China will be the largest market for virtual currency spot ETFs. Tony Luk told Golden Finance reporters that if the mainland market can be successfully connected, the volume is expected to have a certain growth space, but the growth rate also depends on policy progress, and the scale of 5-10 billion US dollars may be reached. At a time when Hong Kong is gradually becoming a discarded child of European and American capital, actively embracing the mainland market can truly revitalize virtual currency spot ETFs. Of course, this is not something Hong Kong can decide.
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