What You Need To Know About Hong Kong’s Spot BTC and ETH ETF Approval (#174 - 21 April 2024)

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This week the Hong Kong regulator approved not only a spot Bitcoin ETF but also a spot Ethereum ETF. 

Here's what this development means and what the practical impact could be. 

First, it's important to understand that the firms that were granted these approvals are not the BlackRocks or Fidelitys of the world but are China-linked related asset managers, specifically firms like China AMC, Bosera, and Harvest Global. 

This is very interesting because whilst Bitcoin trading is banned in mainland China, these firms can now get involved in the ETF action via the Hong Kong Stock Exchange. 

Second, it’s important to note that the mechanism that was allegedly approved is an in-kind creation and redemption mechanism. This differs from what was approved in the US by the SEC, which is an in-cash mechanism for the Bitcoin ETF. 

In an in-kind process, Bitcoin or Ethereum is exchanged with the ETF issuer to create or redeem ETF shares, fostering tax efficiency and minimizing transaction costs. This mechanism also facilitates the arbitrage process, helping to maintain the ETF's market price close to its NAV. Conversely, in-cash redemption involves the exchange of the Bitcoin or Ethereum in the ETF for cash first before the exchange, potentially resulting in tax implications and increased trading costs. The Hong Kong in-kind mechanism makes more sense and is probably cheaper in the long run. 

The third thing to watch is whether these ETFs will one day in the future be approved in the Southbound Stock Connect program, which allows investors in Mainland China to buy stocks on the Hong Kong Stock Exchange. 

Right now, that's not the case. These ETFs will not be included in the Southbound Stock Connect program and there are various minimum requirements before they can be included, from a minimum six-month track record to AUM requirements. 

It'll be interesting to see down the line if the spot Bitcoin and Ethereum ETFs will be included in that bucket. If that happens, it'll probably be the only way to allow Mainland China investors to buy Bitcoin or Ethereum legally unless things change in the country, which doesn’t seem likely to happen anytime soon. 

The fourth thing to note is that this is a very bold move from Hong Kong. 

As many of you may remember, Hong Kong used to be a very strong global crypto hub, a position it has lost over the last two to three years. However, what the Hong Kong regulators have made here is a very bold statement, reinforcing the message that Hong Kong wants to regain that global leader in crypto position. 

There are two caveats we need to keep in mind, though. 

The first revolves around AUM. Yes, the Hong Kong exchange is an important one in Asia. This allows not only Asian investors to buy the ETF in Asian time zones but also investors from all around the world who want to access it. But again, the AUM, we'll see in this ETF, will be far from what we'll see in the US. 

Second, it’s important to understand that the approval didn't come from the SFC explicitly (at least at the time of me sending this newsletter) but were made by the various firms involved in the Hong Kong Bitcoin and Ethereum ETF. 

But it's doubtful these firms made these announcements without any kind of green light from the regulators. So, we should assume that the regulators have blessed this development.

Definitely a topic to follow closely moving forward. 

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Who is Henri?

Henri Arslanian is the co-founder and managing partner of Nine Blocks Capital Management, an institutional-grade hedge fund focused exclusively on digital assets, with a market-neutral crypto fund focused on generating alpha from inefficiencies in crypto markets using relative value, arbitrage, and quantitative strategies. 

Henri was previously a partner and global crypto leader at PwC. In that role, he advised many of the world’s leading crypto exchanges, investors, financial institutions, and tech firms on their crypto initiatives and numerous governments, regulators, and central banks on crypto regulatory and policy matters.

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