Crypto ETF’s Dull Demand in Hong Kong Doubts Regulatory Clarity

• Despite regulatory clarity, Bitcoin and Ethereum ETFs listed in HKSE did not perform as expected.
• Hong Kong introduced new crypto regulations, apparently to be effective from June 1, 2023.

Hong Kong’s crypto regulations are relatively transparent compared to the United States. The Fragrant Harbor plans to release new rules by June 2023, requiring crypto trading platforms to get licenses from its regulator Securities and Futures Commission (SFC). Hong Kong Stock Exchange (HKSE) reported that crypto ETFs listed with them are not performing as expected.

Regulatory Clarity in Hong Kong & Crypto ETFs

HKSE reported that Bitcoin ETH and Ethereum ETF, which are listed with them, had an average trading volume of around 9.30 Million Hong Kong dollars ($1.19 Million) between December 16, 2022, and February 7, 2023. It should be noted that Hong Kong is the first country in Asia to provide access to crypto ETF products.

Operators at the HKSE applauded the regulatory clarity and said it helped them “seize opportunities in virtual asset development.” 

According to a report from April 17, 2023, Bitcoin and Ethereum ETFs listed in the United States Chicago Mercantile Exchange (CME) Group managed to surpass the $3 Billion mark in daily average national value. Also, the ProShares Bitcoin Strategy ETF, listed on NYSE Arca, had an average trading volume of $196 Million.

These numbers are exciting despite the current regulatory scenario in the U.S. Interestingly, the SEC approved ProShares but denied similar services for converting Grayscale Bitcoin Investment Trust (GBTC) to be listed spot ETF. GBTC is the largest over-the-counter Bitcoin fund in America. Moreover, Ark Investment Management’s ARK21 Shares Bitcoin ETF was also denied to operate by the SEC. 

The South Korean conglomerate has also listed its Samsung Bitcoin Futures Active ETF on HKSE, created by its investment management arm. They have designed this product to cater to institutional investors wanting to trade in Bitcoin while in the Asia-Pacific time zone. 

Hong Kong’s Proposed Crypto Regulations

Slated to be effective from June 1, 2023, this new licensing regime would require all centralized digital asset trading platforms operating in Hong Kong or actively marketing to its residents to be licensed by the SFC. This proposal is based on the existing regulatory regime under the Securities and Futures Ordinance, which is comparable to the rules for licensed securities brokers and automated trading venues.

The SFC proposed specific alterations concerning issuing licenses for the platform serving retail investors. Compliance with investor protection measures is necessary if they are provided with one, along with ensuring suitability while onboarding clients and token admission.

Since 2018, the SFC has been a proponent of the ‘same business, same risks, same rules’ principle.’ Ms. Julia Leung, Chief Executive Officer of SFC, argued that recent collapses and bankruptcies in the crypto industry highlight the need for regulations.

Moreover, the operators of digital assets trading platforms wanting to apply for a license will have to alter their systems and controls as per the new regime. At the same time, those who do not plan to apply should be ready for an orderly closure of their businesses in Hong Kong. 

The SFC is planning to issue a list of the regulatory status of virtual asset trading platforms, informing the public. They would keep working with the Investor and Financial Education Council to impart investor education to Hong Kong residents. 

Nancy J. Allen is a crypto enthusiast and believes that cryptocurrencies inspire people to be their own banks and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning.

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