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Hong Kong’s Cryptocurrency ETF Evolution: Navigating Regulatory Waters Amid Global Competition

Hong Kong is gearing up to establish a more adaptable framework for cryptocurrency exchange-traded funds (ETFs), despite the United States leading in both approval speed and market size, according to experts.

The proposed regulations for spot cryptocurrency ETFs in Hong Kong differ significantly from those approved in the US. One key distinction is that Hong Kong plans to permit both cash and in-kind subscriptions. This means that dealers participating in ETFs can use bitcoin directly to subscribe to or redeem shares. In contrast, the US only allows such transactions with cash.

This divergence in approach highlights differences in virtual asset regulatory frameworks. The US Securities and Exchange Commission (SEC) appears hesitant to involve licensed dealers in bitcoin transactions for subscribing to and redeeming ETF shares due to the unregulated nature of spot bitcoin trades in the US, as explained by Andrew Fei, a partner at King & Wood Mallesons in Hong Kong.

Regulators in Hong Kong recently announced their intention to grant retail access to spot virtual asset ETFs and are open to applications from funds seeking to offer such products to the public.

In the wake of the success of nine spot bitcoin ETFs in the US, including those offered by BlackRock and Fidelity, which garnered nearly US$2 billion in their first three days of trading, participants in Hong Kong’s virtual asset industry are urging the government to expedite approval for the city’s own offerings.

Legislative Council member Johnny Ng Kit-chong expressed the hope that Hong Kong can swiftly secure a global position amid the competitive landscape of the virtual asset sector. He emphasized the importance of being a frontrunner in implementing relevant policies and products in Asia.

While SEC Chair Gary Gensler acknowledged the approval of spot bitcoin ETFs, he clarified that the regulator did not endorse bitcoin, characterizing it as a speculative and volatile asset used for illicit activities. Fei pointed out that the SEC remains skeptical due to the largely unregulated nature of the spot bitcoin market in the US.

In contrast, Hong Kong’s regulated environment for spot virtual asset transactions on licensed platforms has made the Securities and Futures Commission (SFC) more comfortable with virtual asset ETFs, according to Fei. The joint plan by the SFC and the Hong Kong Monetary Authority to authorize spot cryptocurrency ETFs has instilled optimism in the industry about Hong Kong’s potential as a cryptocurrency hub.

Dmitry Lapidus, a senior liquid analyst at CoinFund, highlighted Hong Kong’s regulatory adaptability, positioning it well in the evolving digital assets landscape. Kennix Chan, executive director at Victory Securities Company Limited, expressed confidence that Hong Kong’s clear vision on regulating virtual assets would contribute to its role as a global financial hub.

Despite these positive prospects, experts noted that Hong Kong would face formidable competition from the US, particularly considering the substantial size of the American cryptocurrency market and the presence of finance giants such as BlackRock, Fidelity, Franklin, and Invesco. Jack Poon, a professor at the Hong Kong Polytechnic University, pointed out the advantages these US institutions have, including a vast existing customer base, a trusted brand, and low fees that may pose challenges for issuers in Hong Kong in the long run.

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Disclaimer: Not Investment Advice

it’s crucial to understand that the information provided here is not to be construed as investment advice. The crypto market is dynamic and highly speculative, and decisions should be made based on thorough personal research and consideration of individual risk tolerance. Always consult with financial professionals and conduct your own due diligence before making any investment decisions. The intention of this exploration is to present insights and trends, not to provide specific investment recommendations.

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