With the bitcoin halving now firmly in the rear-view mirror (the event itself being overshadowed by a seven-fold spike in miners' fees), many in the digital asset space have already turned their attention to the next major event.
And this is crypto, where the next one is never far away.
This time, the focus has shifted to Asia, where newly-launched spot Bitcoin and Ethereum ETFs have officially started trading in Hong Kong only weeks after their Securities and Futures Commission (SFC) announced a likely approval and making it the first city in Asia to approve a mainstream investment tool for major cryptocurrencies.
Asia's first spot crypto ETFs are a go
Though the approval of the crypto ETFs in Hong Kong was seen as having real bullish potential, the actual launch did little to lift the market out of its current sideways trajectory. By the close of their first trading day (April 30) the new Bitcoin ETFs had recorded an average price rise of nearly 1.7%, while the Ethereum ETFs dropped approximately 0.5%.
However, seen in the context of market conditions overall – change of narrative from cuts to hikes, increasing geopolitical stress, nose-diving Japaneses Yen) and a cool down in Bitcoin ETF inflows (Figure 1), the lack of positive price action means relatively little.
Figure 1: Spot Bitcoin ETF inflows slowed in April after posting big numbers January–March
Additionally, the total market for ETFs in Hong Kong is under 1% of the US market so perhaps the expectations for the first day of trading did not match the realitty on the ground. Regardless, it is the implications of these launches seen in the context of global competition for crypto dominance that is more important. Here, there are several reasons the Hong Kong ETFs are significant.
The Hong Kong spot crypto ETFs: how are they different?
While on the surface there may seem to be very little that separates the Hong Kong spot ETFs from their American counterparts, a closer look reveals that there are significant differences both in terms of how they were approved and their structure.
1. Spot Ethereum ETF approval ahead of the US
The debut of the spot Ethereum ETF means that Hong Kong has stolen a march on the US, where the Ethereum ETF approval is facing further delays by the SEC. It's also worth remembering that, as with the very first bitcoin ETF, Canada was already home to several spot Ethereum ETFs prior to this Hong Kong launch (see 3iQ CoinShares Ether ETF, the Purpose Ether ETF, and others).
2. In-kind crypto ETFs vs cash-create in the US
A not to be overlooked feature of the Hong Kong ETFs is how they differ from US ETFs in terms of redemption. Hong Kong's ETFs are created in-kind, meaning Authorised Participants (APs) provide the issuers with actual crypto (in this case bitcoin or ethereum) when additional shares need to be created which allows investors to use bitcoin and ethereum to invest in ETFs through eligible dealers instead of US dollars or local currency – a clear and calculated innovation over the US offerings.
3. Regulatory decisiveness on digital assets
Last but not least, the fact that it has merely been weeks since the news first broke of the ETFs' impending approval to actual roll-out reflects a degree of political & regulatory willingness to get out of investors' way and not unduly impede the process given the rising global competitiveness in the space. This stands in sharp contrast to the SEC which only just approved the spot Bitcoin ETF in January despite the first filings dating back to Mesopotamian times, and they're doing their best to filibuster Ethereum filings for good measure.
Will mainlanders be able to access the Hong Kong ETFs?
One of the most burning questions now is whether mainland Chinese investors will have access to the new ETFs based in Hong Kong. Historically, investors from mainland China have been subject to restrictions when accessing Hong Kong-based stock exchanges such as the HKEX due to the Special Administrative Region having its own legal and financial systems ("One Country, Two Systems"), but several channels have been established to reduce these frictions.
One such channel, the Stock Connect Program, allows investors from mainland China to trade eligible stocks listed on the HKEX through brokerage accounts opened with designated brokers in mainland China. According to Singapore-based Matrixport, Mainland Chinese investors could hypothetically pour in some $25 billion in potential Hong Kong-listed spot bitcoin ETFs through the Southbound Stock Connect program which facilitates up to 500 billion RMB (HK$540 billion and $70 billion) per year in transactions.
Here, it is noteworthy that the last three years have seen flows of HK$450 billion, HK$400 billion, and HK$320 billion respectively for 2021-23 (Figure 2). This means that flows have fallen short of the Southbound Stock Connect quota limit between HK$100 and HK$200 billion (US$15-25 billion) according to 360MarketIQ data.
Figure 2: Stock Connect could facilitate mainland participation but legal barriers remain
However, the real sticking point here is that the ban on cryptocurrencies currently in effect in mainland China could well be extended to prohibit mainlanders accessing crypto ETF investments, according to Bloomberg.
Should legal loopholes be found to allow mainlanders to invest, however, it will open up large sums of Chinese capital looking for a life raft via bitcoin and ethereum exposure amid the current macro doldrums (288% debt-to-GDP ratio and a collapsing real estate sector) which has shaken confidence and led to underperforming markets. This has left investors looking for alternatives as evidenced by the sharp rise in both retail and institutional demand for gold and record flows for locally-listed Japanese equities trackers.
The Hong Kong ETFs highlight a tightening global crypto landscape
It would be easy to conclude that the drive to fast-track the spot crypto ETFs in Hong Kong was an attempt to piggyback off the success of the US-based launches, but there's more to it than that. Pandemic-era restrictions, the ongoing Chinese debt crisis, as well as faltering Sino-US relations have dented the region's investment attractiveness, and Hong Kong authorities have been keen to boost the city's appeal to traders and investors.
Moreover, the news also demonstrates the state of bitcoin development in China. Even with its prior ban on bitcoin mining and trading, it's clear that Chinese funds are taking notice of Hong Kong's more open policy, even while the mainland continues to exercise caution. Here, Hong Kong essentially provides a legal loophole through which large Chinese funds can gain exposure to bitcoin in a compliant manner.
Ultimately approval and launch of the HK spot-crypto ETFs represent another significant milestone in the maturation of digital assets in the region and signals that the race for global 'hub' dominance is on.
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