Hong Kong’s cryptocurrency spot exchange-traded funds (ETFs) are encountering significant systemic obstacles due to the market’s existing structure and biases, according to Gary Tiu, Executive Director and Head of Regulatory Affairs at Hong Kong crypto exchange OSL. Tiu made these remarks during a panel discussion at the Foresight 2024 conference on Sunday.
Market Structure and Incentives
Tiu highlighted that the Hong Kong market is characterized by a complex layer of intermediaries—such as brokers, banks, and private banks—between issuers and end investors. These intermediaries typically earn substantial fees from distributing financial products. As a result, there is a preference for unlisted products, which offer higher commissions compared to ETFs. According to Tiu, ETFs provide minimal incentives for equity brokers, with commissions only a fraction of those earned from selling structured products.
“This incentive system is one of the reasons why ETFs struggle to gain traction as a financial instrument in Hong Kong,” Tiu explained.
Regulatory Bias and Market Participation
Tiu also pointed out a prevailing negative bias against cryptocurrencies like Bitcoin and Ether among Hong Kong’s regulators and financial institutions. This cautious attitude contributes to the difficulties in expanding the market for crypto ETFs.
Chen Zhao, Digital Assets Director at Fosun Wealth, further elaborated on the challenges facing Hong Kong crypto ETFs. Zhao noted that the market suffers from a lack of dealers and brokers. Hong Kong’s market participants are categorized into three major groups: western institutions, China-based institutions, and local Hong Kong institutions.
Chinese brokers and dealers are either restricted from or choose not to engage with these products, while western financial institutions are more inclined to deal with U.S. ETFs, which offer higher fees and easier access. Consequently, the local Hong Kong participants are relatively small in comparison, limiting the growth of Hong Kong crypto ETFs.
Current Market Data
Despite these challenges, data from SoSoValue shows that Hong Kong’s spot Bitcoin and Ether ETFs have accumulated a net asset value of approximately $310 million since April 30, with a daily trading volume of around $2.8 million. Unlike U.S. crypto ETFs, Hong Kong’s spot crypto funds allow investors to purchase ETFs through in-kind subscriptions of physical Bitcoin, which do not count as cash inflows.
The discussion at the Foresight 2024 conference underscores the systemic and regulatory hurdles that Hong Kong’s crypto ETFs face in gaining broader acceptance and growth.
