Hong Kong is set to introduce its inaugural spot exchange-traded funds (ETFs) for bitcoin and ether on April 30, solidifying its position as a hub for virtual assets, in stark contrast to China’s crackdown on cryptocurrencies.

The Securities and Futures Commission (SFC) of Hong Kong has granted approval for both retail and institutional investors to engage directly in bitcoin and ether, the two leading cryptocurrency tokens globally. This move has positioned the city as an attractive destination for underground crypto investors in mainland China, where bitcoin activities are prohibited.

The approved ETFs in Hong Kong are overseen by Harvest International and China Asset Management, along with a collaborative offering from Bosera Asset Management in Mainland China and HashKey Capital in Hong Kong.

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Thomas Zhu, the head of digital assets and Family Office Business at China Asset Management, expressed optimism about the demand for their ETFs in Hong Kong, citing the increasing adoption of ETFs in both institutional asset allocation and retail trading.

Hong Kong’s approval of spot bitcoin and ether ETFs marks a significant milestone, making it the first jurisdiction in Asia to greenlight such products. This development follows the approval of spot bitcoin ETFs by the US Securities and Exchange Commission earlier this year.

The trading volume for US bitcoin ETFs has surpassed US$200 billion in just three months, as reported by The Block, a prominent crypto news outlet.

Unlike US bitcoin ETFs that require purchases in dollars, Hong Kong’s ETFs allow for in-kind creation models, facilitating the direct exchange of cryptocurrencies for ETF shares.

Jason Jiang, a senior researcher at OKG Research, highlighted the benefits of the in-kind subscription and redemption mechanism, emphasizing its flexibility and arbitrage opportunities for both crypto-native and traditional financial investors.

However, Jiang cautioned that the in-kind creation models could introduce investment risks due to the complexities involved in the exchange, custody, and conversion processes of bitcoin and ether ETFs. Nevertheless, he acknowledged Hong Kong’s robust regulatory framework capable of managing such risks effectively.

The image of the bitcoin logo displayed on a cryptocurrency ATM in Hong Kong on February 29, 2024. Photo credit: Bloomberg

The approval of spot Ethereum ether ETFs by the SFC has positioned Hong Kong ahead of the US and other regions, granting it a competitive edge as a pioneer in this space, according to Tony Tong, the co-chairman of the Hong Kong Blockchain Association.

Tong anticipates that this development could attract a broader group of traditional stock investors from Hong Kong and Asia to venture into crypto investments, starting with spot bitcoin and Ethereum ETFs.

Due to Beijing’s restrictions on crypto trading, mainland Chinese investors may face limitations in participating in these ETFs. A recent survey by Chainalysis revealed that Chinese cryptocurrency profits ranked fourth globally in 2023, trailing behind the US, UK, and Vietnam.

Since 2022, Hong Kong has already approved crypto-futures-based ETFs, with listings such as CSOP Bitcoin Futures, CSOP Ether Futures, and Samsung Bitcoin Futures.

Furthermore, Hong Kong is actively developing a regulatory framework for stablecoins, a type of token pegged to fiat currency on a 1-1 basis and typically backed by cash and bond reserves.