With the recent approval of spot ETFs for both Ether and Bitcoin, there’s been a lot of interest in Hong Kong’s status regarding Bitcoin. They are set to start trading April 30th, 2024. Bitcoin Asia is bringing the event series spawned by the Bitcoin conferences hosted by Bitcoin Magazine’s parent company. Legislators and representatives from the Hong Kong ETF issuers will speak at the event.

Yet, there are discussions about a crackdown on the cash shops, Bitcoin ATMs, and over-the-counter trading desks that once made Hong Kong’s Bitcoin scene so vibrant, along with many cryptocurrencies and Web3 intersecting – and the rise of Ordinals and Runes grabbing attention in Hong Kong. What does all of this mean for Bitcoin in Hong Kong? What is actually going on? The following information comes from my research for my book on Bitcoin + China.

The status of Bitcoin in Hong Kong and the status of Hong Kong in China

The first thing to know about Hong Kong and Bitcoin is how differently they are treated from Bitcoin in mainland China. This results from the “One Country, Two Systems” arrangement between China and Hong Kong. Among other things, this means that Hong Kong has its currency (the Hong Kong dollar) vs. the Yuan, its financial regulatory apparatus (the SFC, which is responsible for the approval of the Bitcoin ETFs in Hong Kong), and a different form of government – though one that still receives a lot of control from the “Central” authorities in Beijing. There is also a different Constitution, known as the Basic Law, that would be difficult but not impossible for “Central” authorities to modify. 

Article 112 in the Basic Law says the right to trade Hong Kong dollars for anything, including Bitcoin, shouldn’t be infringed. However, it won’t prevent the Hong Kong government from regulating Bitcoin exchanges, which is done through a licensing regime. There were traditionally many options for buying Bitcoin in Hong Kong, including peer-to-peer trade in meetups. However, these have gradually become more restricted, starting with exchanges that must be licensed and moving towards imposing the same restrictions on OTC trading desks and ATMs as exchanges.

Since 1997, the Handover has given Hong Kong relative autonomy – but recent protests have augered an era of discontent and fading FDI flows into Hong Kong itself. Hong Kong used to be seen as a place where the West could meet the growing Chinese economy. Now, FDI flows are fewer, and the small ETF market has been outpaced by growth in the domestic Chinese environment.

The Regulatory Environment of Bitcoin in Hong Kong

Hong Kong Bitcoin exchanges are now subject to a new law of regulation. The Basic Law will always permit the trade of Bitcoin within Hong Kong. However, Hong Kong’s crypto license regime will allow the government to approve certain vendors, especially those that ETF issuers will use. OSL Digital and HashKey were the two approved exchanges by the SFC, which regulates digital assets in Hong Kong. The SFC has received applications from 22 exchanges as of April 2024, though by May 2024, its status update will include digital assets exchanges that are forced to shut down. This recent rush of regulations centralizes how Hong Kong can control the fiat on-ramps and off-ramps for “crypto” in its control by shutting down players that don’t work within its rules. The Securities and Futures Commission (SFC) is a hybrid of the SEC and CFTC in an American context – concerned with securities and futures. As a result, it is taking on the approval of exchanges and ETF issuers in Hong Kong markets.

After JPEX, an unlicensed exchange failed, the Hong Kong executive branch vowed to get involved.

Stablecoins like USDT and others will likely be regulated directly by the Hong Kong Monetary Authority, Hong Kong’s central bank. The Hong Kong Monetary Authority and the SFC work together to regulate digital assets and tokens overall, usually encompassing Bitcoin and other cryptocurrencies and stablecoins like Tether.

Since Hong Kong maintains its separate currency and structure, the People’s Bank of China is not involved in regulation, and neither are any of the standard Mainland Chinese regulators. However, the two groups will often liaise. For example, the Hong Kong Monetary Authority is part of the M-Bridge project for the Digital Yuan, and the People’s Bank of China has cooperation agreements with the Hong Kong Monetary Authority to issue RMB in Hong Kong. However, the Mainland still maintains political control over Hong Kong and control of the legislative and executive wings through proxy pro-Beijing parties, especially with the imprisonment or exile of previous pan-Democrat factions. Since District Council elections failed to maintain pro-Chinese support, the Legislative Council has been filled with pro-Beijing members, with pan-Democrat legislators walking out en masse.

How does Bitcoin’s market work in Hong Kong? Who are the stakeholders?

Hong Kong’s government has been trying to move Bitcoin trade from ATMs, OTC trading desks, and cash shops to the ETF and regulated exchanges in Hong Kong. Each ETF issuer works with a Hong Kong custody provider, likely one regulated by the new license. In the past, OTC counters and physical trading stops like Genesis Block used to thrive in Hong Kong—now, many have closed or shifted their focus to an array of cryptocurrencies.

There are Web3 communities in Hong Kong and Bitwork, a Bitcoin-focused coworking space. Mainland investors and Bitcoin-interested individuals are moving funds to Hong Kong. There are those looking to make remittance payments and people looking for stablecoins to interface from closed financial systems to more closed-border ones.

Bitcoin ETFs in Hong Kong

Since 2022, Hong Kong has had Bitcoin futures ETFs and Ether futures ETFs – however, the ETFs don’t hold the underlying asset but rather options traded on the Chicago options exchange. Now, the SFC has, in April 2024, authorized a few spot ETFs in both Bitcoin and Ether on a conditional basis. Though it’s projected that these ETFs will have higher management fees in the realm of 1% to 2% vs. the competitive American spot ETF rate of 0.25%, the ETFs have two distinct advantages – first, they’ll be treated locally in terms of taxes, and Hong Kong has no capital gains taxes or the need to fill out long forms on the topic. Second, they will allow for in-kind redemptions, which means that instead of buying and selling Bitcoin for cash, you can reclaim shares for Bitcoin or Ether.

The issuers in question are an array of mainland Chinese asset managers with Hong Kong divisions. Issuers have discussed the possibility of offshore or high-net-worth individual wealth flowing from China. However, they have also backchanneled that paths of Mainland Chinese capital, such as the Southern Stock Exchange connection, would be barred from sending funds to cryptocurrency ETFs, including the new spot Ether and Bitcoin ETFs.

Bitcoin’s prices have mainly been fixed to the spot ETFs approved in the United States – tracking of who the buyers within those ETFs and the amount of inflows and outflows is a significant determinant in a Bitcoin bull market that has seen Bitcoin rise from around USD 45,000 in price to around USD 65,000. Hong Kong has reportedly fast-tracked conditional approval for spot ETFs in both bitcoin and ether products that will allow for in-kind redemptions, and several subsidiaries of large Chinese investment firms have been among the first successful applicants. Hong Kong will likely beat the United States in terms of spot Ether ETFs for quite a while due to SEC Chair Gary Gensler’s insistence that proof-of-stake tokens are more likely to fit the definition of a security.

China’s 2021 Bitcoin mining and exchanges ban, which caused mining pools to ban Chinese IP addresses from mining and a significant portion of the hash rate to leave the country, seemed to shadow Bitcoin’s Chinese future. Yet, appearances can be deceiving: Chinese people still constitute a significant factor in Bitcoin markets, from buying it together in laundromats to trading with Tether. Analysis after the exchange ban suggests that most Yuan/BTC trade has become USDT/BTC trade. 

Now, Hong Kong is moving to regulate and control “cryptocurrency,” with a licensing regime developed for exchanges. The Basic Law guarantees Bitcoin’s role in Hong Kong, which is the constitutional underpinning of Hong Kong. Specifically, Article 112 of the Basic Law mandates that the Hong Kong dollar should be freely convertible, so it’s unlikely that transacting for Bitcoin will ever be banned in Hong Kong, unlike in the Mainland. 

However, Hong Kong has been regulating the cash shops and OTC counters that serve as a pathway for many to exchange cash for Bitcoin and is trying to create a restrictive licensing regime instead—the ETF is along that vein. 

Across the world, the United Kingdom has also signaled that it will not oppose soliciting applications for Bitcoin and Ether ETNs. ETNs are a cousin to ETFs, where there is more risk as you’re not buying a stake in underlying assets but rather debt issued to obtain them. We could see the beginning of a fight between different financial centers to unleash financial products related to Bitcoin – with Hong Kong trying to fast-track approval to get ahead. While the impact on inflows might be muted compared to the flow from the American spot ETFs, the institutional players it is bringing into the fore (including the HK subsidiaries of some of the largest Chinese asset managers in the world) can get more institutional support and maturity to Bitcoin.

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The players alleged to have applied so far for the spot ETFs in Hong Kong are some of the largest in Mainland China – they are applying through their HK subsidiaries. A source for a Reuters report claimed that the Hong Kong subsidiaries of China Asset Management, Harvest Fund Management, and Bosera Asset Management were among the applicants, and they all posted on WeChat, front-running an official statement from Hong Kong’s SFC, that they had been approved. Harvest Fund Management has $230bn under management – Bosera currently has $200bn under management, and China Asset Management has about $271bn under management. Southern Asset Management Fund has also been reported to have applied for an ETF application with an AUM of $284bn. 

This level of financial assets may pale compared to, say, Fidelity’s ~$ $5tn assets under management. Still, the fact that mainland Chinese players, some of the largest asset managers in the space, are willing to endorse Bitcoin for their clients is important—even if it’s through their HK subsidiary units. Only one top-ten asset manager has applied, leaving plenty of space for more prominent players to join. 

The Chinese government hasn’t publicly commented – however, the issuers were at pains to say that qualified Mainland Chinese investors would still not get access to cryptocurrency ETFs, especially given a climate where gold ETFs are going wild as Chinese investors look to hedge themselves from a faltering economy.

Reported Hong Kong ETF Applications	Status	AUM (latest – includes Mainland Chinese assets)	Ranking in China’s top asset managers (2022)
China Asset Management	Conditionally approved – per Weixin company statement	US$271 billion (2021)	9
Harvest Fund Management	Conditionally approved – per Weixin company statement	US$230 billion (31 December 2020)	16
Bosera Asset Management	Conditionally approved – per Weixin company statement	US$237 billion (31 December 2020)	12
Southern Asset Management Fund	Unclear – reported application	US$284 billion (September 2023)	14
VSFG and Value Partners	Unclear – reported application	$5.9 billion (March 31, 2023)	N/A
TOTAL		1.0279tn in AUM

During the SEC’s spot ETF decision, net inflows among all the funds were about $35 bn (taking into account about $21bn in outflows from Grayscale). Between January 10, 2024 (when the spot ETFs started operating) and April 9, 2024, Bitcoin’s price went from $46,627.78 to $69,139.02 at close (48% price appreciation). 

Different from the American spot ETFs, it’s unlikely there will be outflows on the scale of Grayscale as all parties would be net new. However, it should be noted that Hong Kong welcomed futures-based Bitcoin and Ether ETFs in 2022, which continue to trade and may have some shifted interest as a result (though since these funds don’t hold Bitcoin but rather CBOE futures contracts related to Bitcoin, the effect on Bitcoin markets should be minimal). One of the largest, CSOP’s Bitcoin Futures ETF hit an AUM of $100mn, though perhaps its most intriguing claim, from Alessandro Zhu, their Deputy Head of Fixed Income, was that demand was coming from “offshore Mainland entities.” 

In theory, through the Southern Stock Connect path, there could be ~$25bn of unused quota that could flow from qualified Mainland investors to Hong Kong-based Bitcoin ETFs every year – though that figure should be seen as a very generous absolute upper bound as it would assume that nearly all of the unused quota room in the last few years would go to Bitcoin ETFs instead. There are also reports from the issuers that qualified Mainland Chinese investors will not be allowed to buy Bitcoin ETFs through the Southern Stock Connect. Any Mainland flows (if any) will likely come from offshore entities like the Futures product.  

Meanwhile, the Hong Kong ETF market is robust but potentially not a huge bite of the apple, especially if mainland investors are denied official access. Hong Kong’s HKEX reported $50bn in AUM among all ETFs in 2020 and $5bn in net inflows annually. The approval of Bitcoin and Ether spot ETFs, especially the condensed timeline, seems in line with Hong Kong’s attempts to position itself as a capital of Asian ETF flows – but may not matter as much for prices as the massive inflows we’ve seen from American spot ETFs. 

It’s clear, though, that a Hong Kong spot ETF for Bitcoin has a path to net new funds that could count in the billions, even if qualified Mainland investors are barred from the action – with local buyers benefitting from not having to fill out American tax forms if they buy Hong Kong ETFs. An effect of net inflows on the order of magnitude of $2bn per year, for example, might support and increase Bitcoin prices by a few percentage points and entrench Bitcoin as an institutional force in the Asia-Pacific region. It would be a fraction of where spot ETFs in the United States might settle, but a potentially meaningful one. 

The Hong Kong ETFs will play a role in Bitcoin’s price history, even if it’s mostly sentiment and not inflow. There will likely be geopolitical headwinds on Bitcoin, with downside to risk assets as the world enters into new turmoil, focused on the potential of a war in the Middle East. Equally, however, there may be some upside with the potential of rate cuts and a Fed put, the Hong Kong ETFs and growing amounts of financial products that can trade Bitcoin or Ether across the world, and the bounce that Bitcoin gets after a halving – though discount media reports that the inflows will be significantly similar to those seen with American spot ETF providers, primarily due to the smaller size of the players in question and the legal restrictions on the amount of mainland Chinese funds that can enter Hong Kong. 

Usage in Hong Kong

During the protest movement in Hong Kong, virtual privacy and security began to be valued, as seen in the popularity of end-to-end encrypted apps and VPNs. Bitcoin has seen a significant pickup in Hong Kong regarding ATMs and cash shops and as a conduit for Mainland funds to access cross-border.

Pro-democracy protestors and legislators had their funds seized and their bank accounts frozen. People suspected that Hong Kong police were tracking their public transit cards. Some cryptocurrency trade shops supported Bitcoin, but not many—and funds were sometimes raised in Bitcoin Cash rather than Bitcoin itself. ATM and exchange volume were relatively similar during the protests themselves.

In short, Bitcoin’s potential as a tool and the need for privacy-protecting technologies in a veil of repressive state actions was very pronounced, but actual usage was lower. However, there are now non-profits and some Hong Kongers interested in exploring more.

Hong Kong Bitcoin Community

Various groups are part of the Hong Kong Bitcoin community, including the Hong Kong Bitcoin Association, which ran an ad campaign billing Bitcoin as “being your own bank” on Hong Kong public transit. Several events are also being run in Hong Kong, including Bitcoin Asia and miner conferences. The Hong Kong Bitcoin community’s meetup group offers several upcoming meetups as of April 2024.There are many Web3 and other cryptocurrency events in Hong Kong as well. Hong Kong hosted a Web3 conference, and legislators and regulatory figures were present. Though the Web3 community overlaps with Bitcoin, it’s a strong point of contention for some between which lines should be drawn – there is still a Bitcoin-only community in Hong Kong. The Hong Kong Bitcoin Association will still host events. Yet, as debates flare over Ordinals, Runes, and Web3 vs. Bitcoin, as well as more significant questions about user privacy and self-custody – you can be sure that Hong Kong will be part of the discussion.