Race to launch Hong Kong’s first retail crypto futures ETF begins
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Exchange traded fund providers are busy working towards submitting applications to launch retail-oriented crypto futures ETFs after the local regulator announced it would open the door to such products.
Being among the first to list a retail crypto futures ETF on the local bourse will be particularly critical to the success of the product, given the narrow range of permissible underlying assets outlined in a Securities and Futures Commission circular, experts said.
The announcement created “a lot of interest, a lot of noise”, according to Rocky Mui, Hong Kong-based partner at legal firm Clifford Chance who has worked closely with issuers in the ETF industry.
Richard Douglas, Hong Kong chief executive of Saxo Markets, said his company had a wide range of third-party crypto exchange traded products available to professional investors and it hoped to be able to offer a number of these to Hong Kong retail investors.
The Saxo website lists a few crypto exchange traded notes and ETPs, including CoinShares’ Ethereum Tracker EUR XBT Provider and Bitcoin Tracker EUR XBT Provider ETNs, VanEck’s Bitcoin and Ethereum ETNs, and 21Shares’ Crypto Basket Index ETP.
“There are a number of crypto ETPs [on our shelf] that we believe fall into the existing definition as set forth [in the SFC circular], and as such will be submitting an application imminently,” said Douglas.
Fidelity International, which became the first large global fund firm to offer an ETP physically backed by bitcoin to Hong Kong professional investors last month, declined to share whether it had any concrete plans to apply for a retail crypto futures ETF.
The firm is keeping a close eye on the evolution of cryptocurrencies, as part of a wider exploration of the potential for digital assets, according to Emma Pecenicic, Hong Kong-based Asia Pacific ex-Japan head of digital propositions and partnerships.
Vivien Wong, general manager at virtual assets fund firm New Huo Asset Management, said the company was in talks with ETF-specific asset managers for potential collaborations to put forth a retail crypto futures ETF in Hong Kong.
Joy Lam, Hong Kong-based virtual asset specialist at law firm Baker McKenzie, said there had been strong interest from managers in launching crypto vehicles in Hong Kong for some time.
“We first started getting calls from some of the more traditional fund managers about the possibility of crypto ETFs and other crypto-focused products probably about 15 months ago,” Lam said.
The SFC circular stated that asset managers looking to gain regulatory authorisation would have to demonstrate at least three years’ proven record in managing ETFs. As a result, partnerships between a well-established traditional asset manager and a new crypto-focused firm is what a lot of players are now aiming for.
“The truth of the matter is a lot of the crypto-native or crypto-focused fund managers don’t really have the requisite retail fund experience that is needed for this,” said Lam.
On the other hand, when it comes to crypto expertise, not a lot of traditional asset managers have the requisite record or people on their teams with “significant experience” in virtual asset investments to be able to navigate any market dislocation, she said.
The bigger challenge for players looking to launch a retail crypto futures ETF is the constraints outlined by the SFC on what these funds can invest in, with only bitcoin futures and ether futures traded on the Chicago Mercantile Exchange being permitted.
Experts wonder how many products the Hong Kong market will really be able to support, when the range of permissible underlying assets is so narrow.
“With that narrow range in terms of your investment scope or strategy, if you’re not in the first couple that get approved, it becomes very challenging,” Lam said.
Fund firms could also face competition from overseas players who are being drawn to Hong Kong as a result of the SFC’s openness towards retail crypto products.
Lam has fielded calls from a small number of overseas firms that have launched products in the US and Europe but do not have a presence in Hong Kong or Asia.
“When they saw the news about Hong Kong wanting to allow crypto futures ETFs, they were very quick to get on the phone,” she said.
*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.