Hong Kong issuers don’t care if SEC declares Ethereum a security, official says ahead of BTC, ETH ETF debut

  • Hong Kong Bitcoin and Ethereum ETFs are due to go live on the Hong Kong Stock Exchange on Monday, April 29.
  • Mainland Chinese investors are not allowed to invest in the products, save for those with residence permits.
  • Officials expect $300 million first-day issuance, far above $125 million seen in the US on January 11.

A campaign that started in March is approaching its climax with Hong Kong’s Bitcoin and Ethereum exchange-traded funds (ETFs) due to hit markets on Tuesday, April 30.

Also Read: Spot Bitcoin ETF approvals in the US inspires ambition among Hong Kong industry insiders

Hong Kong Bitcoin, Ethereum ETFs to go live

Hong Kong will officially beat the US in the issuance of in-kind redemptions and subscriptions for Bitcoin ETFs, and then some, as the Asian state will also be issuing ETH ETFs ahead of the US. Local media reports that the products are set to go live at 9:30AM on Tuesday with an announcement from the Hong Kong Stock Exchange.

The briefing cited Zhu Haokang, head of digital asset management and family wealth of China Asset Management (Hong Kong), and Wayne Huang, head of OSL ETF and custody business as they responded to interviews. Key elements in the Q&A are as follows:

Scale of capital inflows, Hong Kong vs. US

According to Haokang, the trading scale of the Hong Kong virtual asset spot ETF on day one of listing can exceed the trading scale of the first day in the US:

US dollar, Hong Kong will exceed US$125 million, and China is confident to become the ETF issuer with the largest trading volume on the first day among the three issuers. The details can be revealed to everyone at 9:30 tomorrow morning.

Huang added that while the products will debut on Tuesday, OSL completed its first day of raising funds on OSL on Monday, citing two funds, “ChinaAMC and another fund that cooperates with us.” He added that the transactions witnessed so far are greater than the capital inflow of the US BTC spot ETF on its first day of trading.

Differentiating spot BTC ETF and spot ETH ETFs in Hong Kong 

Haokang said that unlike the US-based spot BTC ETFs, Hong Kong’s products would have spot and physical subscriptions and redemptions. Also, ChinaAMC's Hong Kong spot ETF is the only ETF with the Hong Kong Dollar, US Dollar and RMB pairs.

Another difference is that beyond the listed shares, there are also unlisted shares. These options are not available in the other two companies.

Unlike in the US, Hong Kong uses cash and physical subscriptions and is open for trading during Asian trading hours. This, according to Haokang, will still attract many American investors.

The reach of Hong Kong virtual asset spot ETF

The physical subscription method is an enabler even for Bitcoin mines as miners can use their Bitcoin holdings to directly purchase virtual asset spot ETFs in Hong Kong.

It would also reach regions like Singapore and the Middle East, which are yet to issue ETFs, with Haokang citing extreme interest among investors.

Family offices across Asia and overseas have also demonstrated interest in spot crypto ETFs.

Securities firms qualified to conduct relevant transactions in physical subscriptions

Currently, only three securities firms can do physical subscriptions in Hong Kong with more expected to come in. The three are Victory Securities, Huaying Securities, and OSL. Brokers are also expected to join the match starting in May.

Operations for physical purchase

Huang highlighted that this was the first time Hong Kong was going for physical operations, adding that the brokerage firm would have to upgrade its license to be able to handle virtual asset transactions:

Investors can transfer their coins to OSL through this brokerage firm, and then finally transfer their equity back to OSL. Transfer it to the fund's custody account and complete the entire process of physical subscription.

OSL’s anti-money laundering process in physical subscription

To open an account, investors are required to connect to OSL through a brokerage firm to open an account. There will be a whitelist verification on the transferring wallet as evidence that it belongs to the investor.

Investment verification will follow, where the user's private wallet is screened for suspicious activity in the past dozens of on-chain transactions. Passing whitelist verification allows money transfer.

The products will also allow wallet-to-wallet transfers between exchanges provided anti-money laundering rules of the other exchange are consistent with the OSL rules. “We can accept the other party's transfer of coins,, he said, adding , “We need the other exchange to provide certain customer information.”

Accessibility to mainland investors

Mainland Chinese investors are not allowed to invest in Hong Kong’s cryptocurrency spot ETFs. It is only accessible to:

  • Hong Kong’s qualified investors
  • Institutional investors
  • Retail investors, and,
  • International investors that meet the regulations

Haokang advised the public to consult brokers and sales channels and monitor corresponding regulatory adjustments or the introduction of a specific regulatory framework in the future.

Impact of US SEC deeming Ethereum a security on Hong Kong’s Ethereum spot ETF

Whether the US defines ETH as a security will not affect the independent decision-making of the Hong Kong Securities Regulatory Commission, said Huang, adding that the Commission has its own set of procedures for determining whether a certain virtual asset is a security and whether it can be opened to retail traders.

Further, Huang highlighted why Hong Kong can be a global pioneer in launching an Ethereum spot ETF. He said:

The regulation of cryptocurrency in the United States has multiple departments speaking out at the same time, or trying to regulate it.

Conversely, this mandate is defined in Hong Kong, unique to the China Securities Regulatory Commission. He added, “Hong Kong has already had a clear definition of Ethereum. Ethereum It is not a security, but the first non-securities virtual asset to be included in Hong Kong supervision together with Bitcoin, and it is one of the two targets that can be provided to retail investors.”

Crypto ETF FAQs

An Exchange-Traded Fund (ETF) is an investment vehicle or an index that tracks the price of an underlying asset. ETFs can not only track a single asset, but a group of assets and sectors. For example, a Bitcoin ETF tracks Bitcoin’s price. ETF is a tool used by investors to gain exposure to a certain asset.

Yes. The first Bitcoin futures ETF in the US was approved by the US Securities & Exchange Commission in October 2021. A total of seven Bitcoin futures ETFs have been approved, with more than 20 still waiting for the regulator’s permission. The SEC says that the cryptocurrency industry is new and subject to manipulation, which is why it has been delaying crypto-related futures ETFs for the last few years.

Bitcoin spot ETF has been approved outside the US, but the SEC is yet to approve one in the country. After BlackRock filed for a Bitcoin spot ETF on June 15, the interest surrounding crypto ETFs has been renewed. Grayscale – whose application for a Bitcoin spot ETF was initially rejected by the SEC – got a victory in court, forcing the US regulator to review its proposal again. The SEC’s loss in this lawsuit has fueled hopes that a Bitcoin spot ETF might be approved by the end of the year.

Possibility of other virtual asset ETFs

Issuers of these virtual assets together with the Commission must find a legal opinion of the security or a non-security status of the asset. They must also turn the legal opinion and the Commission’s  due diligence on the currency into a detailed research report and submit it to the China Securities Regulatory Commission.

Final approval by the China Securities Regulatory Commission will usher the asset to professional investors first. Once a specific liquidity threshold is attained, the asset will be accepted as an ETF. However, It will only be introduced for retail trading once it reaches the scope of an index.

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