HONG KONG: Hong Kong’s spot crypto ETFs have one big attraction: no tax

Hong Kong’s upcoming exchange-traded funds (ETF) that invest directly into cryptocurrencies could be attractive to many Asian investors, industry insiders say, but demand may still be a trickle compared with that in the US.

Hong Kong’s Securities and Futures Commission (SFC) on Monday gave the green light to multiple mainland Chinese fund houses and local virtual asset firms to move forward with their applications to offer ETFs that invest directly in bitcoin and ether, the world’s two largest crypto tokens.

The move, which came only a few months after Hong Kong regulators announced plans to allow spot crypto ETFs, was hailed as a major milestone in the city’s pursuit to become a global virtual asset hub. It also gave the market a rare lead over the US, which has yet to make a decision on allowing spot ether ETFs.

“We can expect a healthy level of interest, especially with other Asian jurisdictions staying away from domestic spot bitcoin ETF issuance for now,” said Angela Ang, senior policy adviser at blockchain analytics firm TRM Labs.

Spot bitcoin ETFs in the US, which were approved in January, are also available worldwide, but many Asian investors may prefer to avoid the hurdle of opening a US investment account and paying the country’s capital gains tax, said Michael Wong, a partner at the law firm Dechert LLP in Hong Kong.

“It’s just more convenient for Hong Kong investors or probably Asian investors generally, who don’t want to open a US brokerage account,” Wong said.

Just the fact of having to fill out US tax forms could be a deterrent for some investors looking for exposure to bitcoin, according to Wong, who also noted that Hong Kong does not tax capital gains.

Hong Kong’s impending approval of bitcoin and ether ETFs is also a “milestone for the digital asset industry at large”, as it “creates an additional regulated avenue for price exposure to the asset class with the ability to trade within the Asian time zone”, said Chengyi Ong, head of APAC policy at blockchain research firm Chainalysis.

Ong noted that demand for price exposure to virtual assets is strong in Asia, which accounted for US$791 billion of the US$1.17 trillion of bitcoin traded in February this year, according to data by crypto news and data outlet The Block. North American investors traded US$113 billion in bitcoin that month.

Ultimately, though, demand for the Hong Kong products will come down to the size of the local market, the fees charged, and similar factors, Ong said.

“Expense ratio will definitely be something that investors will look at,” said Dechert’s Wong. “If you have a comparable or competitive expense ratio for [Hong Kong’s spot crypto] ETFs, then I’m sure that it will be very appealing to a lot of the investors.”

Others have been more dismissive of the new products. Bloomberg senior ETF analyst Eric Balchunas said on X, formerly Twitter, that the offering is “child’s play” compared with similar products in the US because Hong Kong is a comparatively “tiny” market. “Don’t expect a lot of flows,” he wrote.
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Firms planning to launch spot crypto ETFs in Hong Kong should now work on fulfilling other requirements before offering them, such as applying to list them on the local stock exchange, as they await for the SFC’s final approval, according to the regulator. Wong estimated that the ETFs could launch by June.