Hong Kong crypto ETFs face systemic market obstacle, says OSL executive

Hong Kong’s cryptocurrency spot exchange-traded funds face a systemic obstacle in which the market lacks incentive for ETFs in general, Hong Kong crypto exchange OSL’s Executive Director and Head of Regulatory Affairs Gary Tiu said during a panel discussion at the Foresight 2024 conference on Sunday.

“So in Hong Kong, especially when it comes to funds and structured products, typically in between the issuer and the end investors there is a very rich layer of intermediaries — brokers, banks, private banks, retail banks, etc.,” Tiu said. “Those intermediaries make a lot of money from distributing financial products.”

Tiu said this has led the Hong Kong market to favor unlisted products, whereas ETFs lets anyone execute trades on the market. Hence, ETFs provide very little incentives for equity brokers of around a few basis points of commission, which is about 1% to 2% of commission derived from selling a structured product, Tiu said.

“So I think the incentive system in Hong Kong is one of the reasons why ETFs do have a bit of a hard time growing as a financial instrument,” the OSL director commented.

Furthermore, Tiu stated that Hong Kong still has a negative bias against bitcoin, ether and cryptocurrencies in general.

“I think there is still a bit of a bias in the eyes of the regulators and also in the eyes of the financial institutions, that somehow bitcoin ETF is just this unique class of risk that you need to be extra cautious about,” said Tiu.

Chen Zhao, the digital assets director of Fosun Wealth, added that Hong Kong crypto ETFs also lack in numbers of dealers and brokers. There are three major categories of market participants in Hong Kong — western institutions, China-based institutions and Hong Kong-based institutions.

“Chinese brokers and dealers, they’re not allowed or they choose not to deal with the product,” Zhao said. “And for the western financial institutions, they don’t have the necessity of dealing the products because they acquire more fees and incentives, and have easier access to the U.S. ETFs.”

The remaining participants from Hong Kong are “very little” in size compared to the two major groups of participants, which acts as a major constraint to the growth of Hong Kong crypto ETFs, according to Zhao.

According to data from SoSoValue, Hong Kong’s spot bitcoin and ether ETFs have amassed a total net asset value of around $310 million since April 30, and recorded a daily trade volume of around $2.8 million. However, unlike U.S. crypto ETFs, Hong Kong’s spot crypto funds allow investors to buy ETFs via in-kind subscriptions of physical BTC that do not count as cash inflows, SoSoValue clarities.

Disclaimer: Foresight Ventures is a majority investor of The Block. Foresight 2024 was hosted by Foresight Ventures, Foresight News and The Block, and sponsored by OSL.