Hong Kong Approves Spot Bitcoin and Ether ETFs, Aims to Become Digital Asset Hub

Hong Kong has officially approved the listing of six cryptocurrency-based spot exchange-traded funds (ETFs), including three spot bitcoin and three spot ether ETFs, which will begin trading on April 30, 2024. The approval marks a significant step in Hong Kong's efforts to establish itself as a leading digital asset hub, following the lead of the United States.

The ETFs will be of the 'in-kind' variety, allowing investors to wager on the price of the two dominant cryptocurrencies without having to buy them directly. Unlike the cash redemption model used by US funds, Hong Kong's ETFs will utilize an in-kind subscription and redemption mechanism, offering greater efficiency and arbitrage opportunities. The ETFs will be managed by Bosera-HashKey Capital, China Asset Management (ChinaAMC), and Harvest Fund Management.

Why this matters: The introduction of spot crypto ETFs in Hong Kong signifies the city's ambition to position itself as a hub for digital assets and could attract significant demand from investors in the Asia-Pacific region. The approval of these ETFs is expected to pave the way for more progressive cryptocurrency regulations in Hong Kong and potentially across the region.

Analysts predict that the Hong Kong spot crypto ETFs could cumulatively bring in about $1 billion in assets under management within the first year or two, representing about 2% of Hong Kong's $50 billion ETF market size. However, the inability of mainland Chinese investors to invest in these products due to the government's ban on crypto-related transactions could impact the capital flow into the Hong Kong ETFs.

The introduction of these ETFs is expected to spark a fee competition among issuers, with Harvest offering the lowest fees starting at 0.3% post-waiver. "We expect to see a fee war unfold among the issuers," said Rebecca Sin, an ETF analyst at Bloomberg Intelligence.

The approval of spot crypto ETFs in Hong Kong comes just three months after the U.S. launched its first spot bitcoin ETFs, which have already attracted around $12 billion in net inflows and contributed to a surge in bitcoin's price earlier this year. The Hong Kong-listed crypto ETFs are another critical step towards making crypto assets more accessible to traditional investors globally, though the impact may not replicate the success of the U.S. offerings due to the smaller size of the regional asset managers.

Key Takeaways

• Hong Kong approves 6 crypto spot ETFs, including 3 each for Bitcoin and Ether.
• ETFs will use in-kind subscription/redemption, offering greater efficiency and arbitrage.
• ETFs expected to attract ~$1B in AUM in 1-2 years, 2% of Hong Kong's $50B ETF market.
• Approval marks Hong Kong's ambition to be a digital asset hub, following the US.
• Fee competition expected among issuers, with Harvest offering the lowest fees at 0.3%.