Hong Kong ready to accept crypto spot ETFs

The Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) have explicitly and officially stated that they are willing to accept requests for authorization of crypto spot ETFs.

They did it in a circular published on the official website of the SFC.

The circular to approve crypto spot ETFs in Hong Kong

The document is explicitly titled “Joint Circular on the activities of intermediaries related to virtual assets” and has been drafted by both SFC and HKMA.

First of all, in the document they reveal that they have received an increasing number of requests from intermediaries regarding the distribution to clients of investment products with exposure to virtual assets. They also state that such intermediaries are interested in providing virtual asset trading services to their clients.

But the most significant steps are those concerning the so-called spot VA ETFs, where VA stands for virtual asset (i.e. cryptocurrencies).

Remembering that the SFC has already authorized the offering of exchange-traded funds based on crypto futures to retail clients (ETF futures VA), they state that the two agencies have recently revised their policy for intermediaries wishing to engage in activities related to virtual assets. 

On this subject, they write: 

“The policy is updated in light of the latest market developments, in which the SFC has authorized VA futures ETFs and is willing to accept authorization requests for other funds with exposure to virtual assets, including spot VA ETFs.”

Spot ETFs could soon arrive on the Hong Kong market

Unlike ETFs based on futures contracts, spot ETFs must be collateralized in the underlying asset. 

Or rather, crypto ETFs on futures replicate the price trend of their reference cryptocurrency, but are collateralized with futures contracts on the price of the same.

Instead, crypto spot ETFs are directly collateralized with the cryptocurrency they aim to replicate the price trend of. 

Even in the USA, crypto ETFs on futures have already been authorized, and those under approval at the beginning of January are spot ones. 

In Hong Kong, it seems that no requests have been made yet for the issuance of crypto spot ETFs, but with this circular, not coincidentally made public, it is almost as if the SFC wants to stimulate this type of request, since crypto futures ETFs already exist in Hong Kong. 

After all, Hong Kong is the international Chinese financial hub, and therefore it must somehow follow global trends if it wants to keep up with the times. It should be remembered that, after the US market, the Chinese market is probably the largest crypto market in the world, especially in terms of potential, since crypto trading is still officially banned in China.

Just as crypto spot ETFs in the USA could attract a lot of capital from institutional clients or wealthy individuals, something similar could also happen in China. And since for every issued spot ETF share, crypto tokens will have to be immobilized, this could reduce the supply of cryptocurrencies in the spot markets, causing their price to increase. 

The Chinese ban

China has imposed a total ban on crypto trading to its citizens in 2021.

If at first it seemed that the ban was having an effect, it is now clear that many Chinese people are able to bypass it by using foreign exchanges. 

At this point, it seems to make very little sense to keep such a ban alive, especially in the case of a bull run: it would only prevent honest Chinese citizens from taking advantage of an opportunity. 

Hong Kong, or rather the international financial hub of China, has been trying to open up to the crypto market for some time now, surely with the consent of the Chinese authorities. But certainly, the goal is to do so in the most respectful way possible of the laws and policies of the Asian giant. 

Crypto spot ETFs could help a lot in this regard, as they would allow Chinese investors to take a position on the price of cryptocurrencies without having to buy them directly, and above all using fully regulated financial products. 

The impact on prices

For now, it is still far too early to imagine which and how many crypto spot ETFs will be launched in Hong Kong. Furthermore, it is not even possible to hypothesize about timing, so the consequences may take a while to materialize. 

However, for example, for the US market, the request from BlackRock in this regard came in June, and within six months it should receive approval. These timelines also include the time needed to promote the product and have it accepted by investors, with perhaps two or three years needed to reach its peak.

So it seems almost impossible that any potential Chinese spot crypto ETFs could arrive in time to influence the price of cryptocurrencies already during the next bull run. 

They could instead potentially be protagonists later on, or during the subsequent bear market or even during the following bull run.

What seems clear, however, is that China has decided not to be self-excluded from this epochal evolution anymore.