On April 15th, the Hong Kong SFC approved three institutions to issue Bitcoin and Ethereum spot ETFs. Unlike the United States, which has not approved Ethereum ETFs and allows only cash settlement, Hong Kong’s move to allow both Bitcoin and Ethereum ETFs with physical delivery has drawn global attention. OSL is the first compliant and licensed cryptocurrency exchange in Hong Kong. The SFC mandates that ETF issuers must trade and custody through compliant exchanges. Among the three approved BTC/ETH ETF issuers, two are collaborating with OSL. In this session, we spoke with OSL CEO Patrick Pan and OSL ETF business head Wayne Huang.
The original text is in Chinese, translated using ChatGPT, and may contain errors. Please listen to Youtube for the full podcast: https://youtu.be/lfbsZxT1wW8
Background information: The three institutions that have received provisional approval this time are Harvest Global Investments, Bosera Asset Management (International), and ChinaAMC(Hong Kong), all of which will issue Bitcoin spot ETFs and Ethereum spot ETFs. Note that the current approval from the Securities and Futures Commission of Hong Kong is provisional, and it will take some time before the products are listed.
Due to the requirements of the Securities and Futures Commission of Hong Kong, the custodian and trading of ETF issuers must cooperate with exchanges licensed by the Hong Kong VATP. Among them, Bosera Asset Management (International) and HashKey Capital will jointly issue and manage products, expected to be listed on the Hong Kong Stock Exchange and adopting a physical subscription mechanism. The former will serve as the fund manager, and the latter as the deputy fund manager. Harvest Global Investments’s products will be provided with custody and trading services by OSL Digital Securities Limited. The products issued by ChinaAMC(Hong Kong) will be deployed by OSL Digital Securities Limited and the custodian institution, BOC International UK Trust Corporation Limited.
OSL Digital Securities Limited, which provides services to Bosera and ChinaAMC, is the first licensed and insured digital asset platform approved by the Securities and Futures Commission of Hong Kong. It is understood that OSL, by providing custody and trading services to fund companies, can effectively address issues such as excessive margin requirements, price premiums caused by shortfalls, and roll-over losses, thereby more accurately reflecting the real-time value of Bitcoin.
Why is the progress so fast in Hong Kong?
OSL: Both Bosera and ChinaAMC companies started their research shortly after the Securities and Futures Commission’s ETF announcement in December 2023, and officially contacted OSL in January 2024 to launch their ETFs, which is unusually fast. Hong Kong’s regulatory framework has always been relatively clear. There has been essentially one regulatory authority for securities and futures in Hong Kong, which is the Securities and Futures Commission. They have already distinguished between what is called securities and what is not. According to this regulatory framework, non-securities such as BTC and ETH can first be opened for retail trading. The next step is to develop ETF products to allow more traditional investors to trade, so the regulatory approach has always been consistent. In contrast, in the United States, there are several departments regulating this matter simultaneously. These departments are often in disagreement and competing with each other. This is why the progress of their ETHETF products is so slow because there are indeed many different opinions stating that ETH may be considered a security.
Does the Securities and Futures Commission of Hong Kong not consider ETH as a security?
OSL: The Securities and Futures Commission has already made a clear definition long ago that both BTC and ETH are not securities.
Every time we want to list a coin on a compliant exchange, we first need to have a legal opinion explaining why this thing is not a security, and this legal opinion needs to be approved by the Securities and Futures Commission. The commission has its own approval criteria. Currently, we have listed approximately over a dozen coins that are non-securities (AAVE, BAT, BCH, COMP, GRT, LINK, LTC, UNI, USDC, USDT).
Why does Hong Kong allow physical delivery while the United States does not?
OSL: I think it’s because of differences in regulatory approaches. In Hong Kong, there is a clear definition of securities and non-securities, and there are clear guidelines on how to comply with the AML and KYC regulations within the current regulatory framework. So, in this situation, after operating for several years, the Securities and Futures Commission of Hong Kong still has confidence in us. Through the AML and KYT checks on our VATP platform, the risks are generally manageable. Therefore, the Securities and Futures Commission allows the action of subscribing to funds with physical cryptocurrencies.
Wu Blockchain mentioned in a previous article that currently, in the Hong Kong region, two models, Cash Model and In-Kind Model, are allowed for issuing virtual asset spot ETFs. The main reason is that the United States currently does not have specific regulations for virtual asset trading platforms. If physical redemption and subscription were accepted, criminals might use BTC directly to launder money by purchasing ETFs. However, in Hong Kong, licensed exchanges are required to comply with the Anti-Money Laundering Ordinance, and strict KYC/AML checks are required for depositing and withdrawing assets from platforms. Therefore, using licensed exchanges for physical redemption and subscription can effectively avoid the problems faced by the US market. However, this also adds additional requirements to the Hong Kong market: cash redemption and subscription must be conducted on licensed exchanges in Hong Kong, but can be either on-platform or off-platform; physical redemption and subscription require virtual assets to be transferred to licensed exchanges in Hong Kong or financial institutions recognized by the HKMA (Authorized Financial Institutions, AIs) and their subsidiaries; participating traders (PDs) need to hold upgraded №1 licenses.
What does provisional approval mean?
OSL: The difference lies in the final details of the documents, including the filing procedures for listing on the Hong Kong Stock Exchange. This also includes some procedures regarding the final subscription with clients when the fund is initially launched. These may require some preparation time. So, basically, there won’t be much difference in the content of the approval documents, but rather, there may be some procedural requirements from the Hong Kong Stock Exchange and various parties, including investors, which may need some time to prepare.
Can mainland investors buy?
OSL: As for whether mainland investors can buy or sell through southbound funds, we need confirmation from the issuer. However, we expect that initially, offshore funds will be the main focus.
(Earlier, several issuers of Bitcoin ETFs in Hong Kong mentioned to Wu Blockchain that southbound funds definitely cannot purchase virtual currencies and related ETFs. A previous report by Matrixport indicated that a Bitcoin spot ETF listed in Hong Kong could potentially attract up to $25 billion in capital inflows from mainland China investors through southbound channels. However, several Hong Kong ETF participants dismissed this as groundless. Mainland Chinese capital investing in Hong Kong stocks needs to go through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect to enter Hong Kong from mainland China, collectively referred to as southbound capital.)
Will other tokens be introduced in the future for ETFs?
OSL: I think it’s highly likely because the Securities and Futures Commission is actively exploring and encouraging the market to explore in this area as well. However, this may be a gradual process. The rapid launch of BTC and ETH as two products is based on the fact that these two tokens have been available for trading by investors in Hong Kong for a long time, and they were even made available to retail investors in June last year. So, the consensus to turn these two coins into ETF products is relatively high. As for other tokens, it may require further product development work with fund companies and the Securities and Futures Commission. They need to first allow retail investors to trade them before they can be developed into ETF products. Even with just BTC and ETH, there are already some more innovative products coming out next, such as structured products or leveraged products. I believe fund companies are intensively involved in research and development in this area.
What are the differences compared to products in Europe and Canada, and are you concerned about lower trading volume?
OSL: We have looked into or studied this issue before. Generally, the trading volume in the securities markets in Europe or Canada is not large. From the perspective of traditional financial centers, apart from the United States, theoretically, it’s mainly London, Hong Kong, and Singapore. Bitcoin ETFs have a certain uniqueness in that they attract some people from the traditional cryptocurrency community. I believe the proportion of Chinese investors in the traditional cryptocurrency community is relatively high. So, we are relatively confident in the Hong Kong market. The liquidity here is definitely better than in Switzerland or Canada. Additionally, for Chinese investors, they are more familiar with or more willing to participate in the Hong Kong market.
What are the differences between directly buying Bitcoin and buying ETFs?
OSL: For example, if you have an account with a brokerage but not with OSL, you can purchase ETFs through your existing brokerage just like buying stocks. After selling the ETF, you can immediately convert it into cash or exchange it for other securities such as stocks or bonds. So, at the brokerage level, you can achieve diversified asset allocation, which is relatively attractive for some ordinary retail investors. They don’t need to open a separate account with a VATP or hold cryptocurrency assets separately.
The same applies to institutional purchases. For example, many institutions or funds are not authorized to directly purchase cryptocurrencies. They can indirectly acquire exposure to cryptocurrencies through ETFs.
The difference between futures and spot ETFs
OSL: Futures have a set expiry date, and the operations are relatively more complex compared to passive holding of spot strategies, so the management fees are also higher. Spot ETFs, on the other hand, are lower in cost and more efficient products.
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