The Securities and Futures Commission (SFC) of Hong Kong has approved the issuance of Bitcoin and Ethereum spot ETFs by three institutions on April 15th. Unlike in the United States, the approval not only includes Ethereum but also allows for physical delivery, attracting global attention. OSL is the first licensed cryptocurrency exchange in Hong Kong to comply with regulations. The SFC requires ETF issuers to trade and custody through compliant exchanges. Currently, two out of the three approved BTC/ETH ETF issuers are collaborating with OSL. We conducted an interview with OSL CEO Patrick Pan and OSL ETF Business Manager Wayne Huang immediately after the announcement.
Background information: The three institutions that have received preliminary approval are CSOP Asset Management, Fidelity International, and Huatai International, all of which will issue Bitcoin and Ethereum spot ETFs. It is important to note that the approval from the SFC is preliminary, and it will take some time before the products are listed.
The SFC requires ETF issuers to collaborate with VATP-licensed compliant exchanges for custody and trading. CSOP Asset Management and HashKey Capital will jointly issue and manage the products, which are expected to be listed on the Hong Kong Stock Exchange and adopt an in-kind creation and redemption mechanism. CSOP Asset Management will serve as the fund manager, while HashKey Capital will act as the deputy fund manager. OSL Digital Securities Limited will provide custody and trading services for the products issued by Fidelity International. The products issued by Huatai International will be deployed by OSL Digital Securities Limited and custodian institution BOCI-Prudential Trustee Limited.
Why is Hong Kong moving so quickly?
OSL: The regulatory framework in Hong Kong has always been relatively clear. In Hong Kong, there is only one regulatory authority for securities and futures, which is the Securities and Futures Commission. They have clearly defined what is considered a security and what is not. According to this regulatory framework, non-security tokens like BTC and ETH can be made available for trading by retail investors. The next step is to create ETF products to allow more traditional investors to trade. This regulatory approach has been consistent. In the United States, however, there are several regulatory authorities governing this matter, and they are in conflict with each other. This is why the progress of ETH ETF products in the US has been slow, as there are different opinions on whether ETH can be considered a security.
Does the SFC not consider ETH as a security?
OSL: The SFC has already provided a clear definition for BTC and ETH as non-securities a long time ago.
Every time we want to list a token on our compliant exchange, we need to provide a legal opinion explaining why it is not a security or why it is a security. This legal opinion needs to be approved by the SFC, which has its own approval standards. So far, we have listed over a dozen tokens that are considered non-securities (AAVE, BAT, BCH, COMP, GRT, LINK, LTC, UNI, USDC, USDT).
Why does Hong Kong allow for physical delivery while the US does not?
OSL: I believe it is due to the difference in regulatory approach. In Hong Kong, there is a clear definition of securities and non-securities, as well as how AML and KYC should be conducted to comply with the regulatory framework. After operating for several years and undergoing AML and KYT checks, the risks are under control, which is why the SFC allows for the subscription of physical cryptocurrencies in the form of ETFs.
Wu Shuo:
In a previous article, it was pointed out that virtual asset spot ETFs issued in Hong Kong can adopt two models: cash model and in-kind model. The main reason is that there are no specific regulations for virtual asset trading platforms in the United States. If in-kind creation and redemption were accepted, criminals could potentially use BTC to launder money by directly purchasing ETFs. However, in Hong Kong, licensed exchanges are required to comply with the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance, and both deposits and withdrawals require strict KYC/AML checks. Therefore, the use of licensed exchanges for in-kind creation and redemption can effectively avoid the problems faced by the US market. However, this also adds additional requirements to the Hong Kong market: cash creation and redemption must be conducted on licensed exchanges in Hong Kong, either on-platform or off-platform; in-kind creation and redemption require the transfer of virtual assets to licensed exchanges in Hong Kong or Authorized Financial Institutions (AIs) recognized by the Hong Kong Monetary Authority (HKMA) and their affiliates. PDs participating in creation and redemption need to hold an upgraded Type 1 license.
What does preliminary approval mean?
OSL: The difference lies in the final details of the documents, including the procedures for listing on the Hong Kong Stock Exchange and the procedures for initial subscriptions with clients. These may require some preparation time. Therefore, there won’t be much difference in the overall approval process. It is more about the time required for procedures with the Hong Kong Stock Exchange, as well as the preparation time for various parties, including investors.
Can mainland investors participate?
OSL: Whether southbound funds can buy or sell, we need confirmation from the issuers, but we expect offshore funds to dominate the initial issuance.
(Several Hong Kong BTC ETF issuers previously told Wu Shuo Blockchain that it is impossible for southbound funds to purchase virtual currencies and related ETFs. Matrixport previously reported that Bitcoin spot ETFs listed in Hong Kong are expected to attract up to $25 billion in capital inflow from mainland China. However, several Hong Kong ETF participants have stated that this is baseless. Mainland Chinese capital investing in Hong Kong stocks needs to enter Hong Kong through the Shanghai-Hong Kong Stock Connect or the Shenzhen-Hong Kong Stock Connect, and the combined capital from both sides is referred to as southbound capital.)
Will other tokens be launched in the future?
OSL: I think it is highly possible because the SFC is actively exploring and encouraging market participants in this area. However, the progress will be gradual. The rapid launch of BTC and ETH ETFs is based on the fact that these two tokens have been open for trading by investors in Hong Kong for quite some time. They were even made available to retail investors in June last year. Therefore, there is already a consensus on creating ETF products for these two tokens. As for other tokens, further product development work needs to be done with fund companies and the SFC. They need to be made available for trading by retail investors first before they can be developed into ETF products. Even for BTC and ETH, there will be more innovative products in the future, such as structured products or leveraged products. I believe fund companies are actively working on research and development in these areas.
What is the difference between buying Bitcoin directly and buying ETFs?
OSL: For example, if you have an account with a brokerage firm but not with OSL, you can purchase ETFs through your existing brokerage account, just like buying stocks. After selling the ETF, you can immediately convert it into cash or other types of investments such as stocks and bonds. So, at the brokerage level, you can have a diversified portfolio of multiple assets, which is attractive to retail investors. They don’t need to open a separate account with VATP or hold cryptocurrency assets separately.
The same applies to institutional investors. For example, many institutions and funds are not authorized to buy cryptocurrencies directly. They can indirectly purchase the tokens by investing in ETFs.
Difference between futures and spot ETFs
OSL: Futures have a fixed term and are more complex to operate compared to passive spot strategies. Therefore, the management fees for futures are higher, while spot ETFs have lower costs and higher efficiency.
Tags:
Ethereum
Wu Shuo Blockchain
Bitcoin
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Note: The translation is provided as is, without any further explanation.