Hong Kong leaps into Ethereum ETFs amid Bitcoin ETF delays

Hong Kong is gearing up to introduce Ethereum ETFs, racing to beat the U.S. in the global crypto game, as Bitcoin ETFs face launch delays.

Financial institutions in Hong Kong are racing to roll out Ethereum (ETH) exchange-traded funds (ETFs) before the U.S. does, aiming to establish dominance in the crypto market.

Following the successful introduction of Bitcoin (BTC) spot ETFs in the U.S. in January 2024, Hong Kong is keen to leverage the growing demand for crypto investment products.

Although Hong Kong began accepting applications for Bitcoin spot ETFs in December 2023, they have yet to see the launch of such products, leaving Asian investors potentially lagging behind their American counterparts.

To prevent this disparity, institutions in Hong Kong are actively preparing for the launch of Ethereum spot ETFs, aiming to seize a competitive advantage and strengthen the region’s role in the global cryptocurrency market.

The decision comes amid remarkable inflows into Bitcoin spot ETFs in the U.S., with the market cap of Bitcoin ETFs reaching nearly $72 billion as of Mar. 18.

Competition and fee dynamics

In Hong Kong, there’s a clear enthusiasm for crypto investments, especially noticeable in the strong growth of Bitcoin futures ETFs.

The Southern Bitcoin ETF (3066) and the Samsung Bitcoin ETF (3135) have doubled in value since their inception, reflecting investor appetite for crypto-related financial products.

One key player in the ETF race is Venture Smart Financial Holdings Ltd. (VSFG), a giant in Hong Kong’s financial sector. VSFG is gearing up to introduce a spot Ethereum exchange-traded fund (ETF) in Q2 if it successfully launches Bitcoin ETFs in Q1. 

Lawrence Chu, Chairman of VSFG, revealed in an interview with the Block that gaining approval for ETFs requires in-depth discussions with regulators.

Chu also mentions the possibility of a fee war among asset managers in Hong Kong as several firms prepare to launch spot Bitcoin ETFs. This means there might be competition to offer lower fees, similar to what we’ve seen in the U.S. 

Spot ETFs delay in Hong Kong

The delay in launching spot BTC ETFs in Hong Kong has sparked concerns among industry players, who fear that Asian investors may face disadvantages as a result. 

Despite authorities in Hong Kong accepting applications for spot Bitcoin ETFs since Dec. 2023, no products have been launched thus far. 

Weng Xiaoqi, CEO of Hashkey Exchange, emphasized the consequences of the U.S. SEC approval of spot Bitcoin ETFs. He highlighted that the delay in approving these ETFs could expose Asian investors to higher fees and risks associated with delayed entry of U.S. capital into the market.

“The delayed launch of spot ETFs in half a year also means that It will be half a year later for U.S. capital to enter the market. At that time, it will face higher purchase costs and entry points and will have to bear the risk of being locked in by U.S. capital,” Xiaoqi reportedly explained.

To address these concerns, Xiaoqi revealed that several industry stakeholders are actively advocating for the expedited launch of crypto ETFs in Hong Kong. 

Many anticipate that introducing these ETFs will attract large capital to the region, further bolstering its position in the global financial landscape.

Regulations in Hong Kong

Throughout 2023, Hong Kong made notable progress in the crypto regulations, aiming to position itself as a central hub for web3 and digital asset innovation. 

This development is part of a broader Asian momentum towards embracing the digital economy, with Singapore, Dubai, and other regions leading efforts through substantial regulatory advancements. 

In Jun. 2023, Hong Kong initiated a crypto licensing regime tailored to virtual asset trading platforms. This regime granted licenses to exchanges, such as HashKey and OSL, to extend their trading services to retail investors.

Further bolstering this initiative, the Securities and Futures Commission (SFC) of Hong Kong updated its guidelines to expand the spectrum of investors eligible for crypto ETF engagements, signaling its intent to diversify investment opportunities and make the crypto market accessible to a broader audience. 

The guidance and circulars issued by the SFC in 2023 emphasized the need for transparency, due diligence, and understanding of virtual assets. 

For instance, recognizing the risks associated with the volatile nature of crypto assets, the guidelines stress the importance of offering complex crypto products, like ETFs, primarily to professional investors alongside the requirement for a virtual asset-knowledge test to safeguard investors from the inherent risks.

Additionally, the issuance of circulars focusing on the oversight of digital asset tokenization activities highlights a forward-thinking approach to managing and nurturing the growth of virtual assets in a regulated manner.

In totality, Hong Kong’s regulatory approach aims to protect investors from potential market manipulation and fraud and establish Hong Kong as a reliable and secure marketplace for global investors interested in virtual assets.

The road ahead

With financial institutions gearing up to launch spot ETFs, Hong Kong could give tough competition to its global counterparts in offering diversified crypto investment products. 

However, regulatory approval and managing competitive dynamics, particularly around fee structures, will be crucial for these institutions. As such, the upcoming period is critical, with the potential to set new precedents in the crypto ETF landscape.