Apr 16, 2024

OSL Executive Director and Head of Regulatory Affairs Gary Tiu weighs in on the state of spot bitcoin and ether ETFs in Hong Kong and how long it will take for the products to reach the final stage of approval, and be available for traders.

Video transcript

Do you think that we're going to see the same price action we saw back in January when the US ETF S were approved? E even though Sure in Hong Kong, it's a, it's a much shorter time. But for the managers, managers to spend so much time and money on a new product, they see an upside. They, they, they see demand for the product and ETF S are very expensive to set up. So unless the managers, at least at least, you know, took a, took a semi optimistic view as a basic minimum criteria, they wouldn't be doing the products. So II I would, I would bet with the managers. It's Tuesday, April 16th 2024. And this is markets daily a show where we get into the minds of some of the smartest, most experienced investors, traders, analysts, economists, professors and anyone who has a hot or smart take about what's going on in the crypto markets. I'm Jen Sasi. Before we get into our discussion today, let's take a look at what's going on in those markets. It is completely read across the board. Both Bitcoin and Ether are down more than 5% this morning. Now, I was reading some reporting this morning and analyst Marcus Teen who has been on the show before and he's been pretty accurate with his predictions, predicting the downturn in November 2022 and the recent all time highs. He recently said that he is taking a bearish look ahead of the having because of persistent inflation. I tend to follow what Marcus Teen says very carefully. So we'll continue keeping you updated on what he's saying. Despite this, though, some are looking towards the upcoming Bitcoin having to be a very bullish catalyst for the Cryptocurrency. So we'll just have to wait and see what happens. The having is days away. More bullish catalysts are coming from Hong Kong. We're going to take a look at what's going on in the region in just a second. But let's take a look at those prices. Now, according to the coin desk indices at 8:30 a.m. Eastern time, Bitcoin was down almost 5% at $63,122 while Ether was down again, almost 5% at 3079. And the coin dust 20 index was at 2160 points down over 5%. All right, let's get to that discussion now. For more on markets action. Let's bring in Os L Executive Director and Head of Regulatory Affairs, Gary. Teu Gary, welcome to Markets Daily. Thanks Jen. Good to be on the show. Great to have you here. Now, I need you to clear something up for me. Have the spot, Bitcoin and Ether ETF S been approved in Hong Kong. I know yesterday there was some back and forth with issuers saying they were approved and then deleting those messages very similar to what we saw in the United States in January. Have they been approved? Ok. So what what they have in Hong Kong right now is um what is commonly referred to as approval in principle. So that means most of the big hurdles um the substantive vetting of the products um should be basically completed. But um they may still have a few conditions they have to satisfy before they can officially go live. And when we talk about go live, we mean actually starting the public offering of the products. Um So our understanding is that um three issuers have received approval uh approval in principle for their products. So that's, that's the technical answer um to, to your question. Ok, great. So three issuers have received approval in principle, how long until um we know if those extra conditions have been met and these products can be available to traders. Um That's probably a bit hard to say. Um But II I would say, given, given that approval in principle, typically happens when really the biggest hurdles ever have already been overcome. I would say what remains are probably more sort of technical conditions. Um And probably operational readiness and, and, and, and, and that point is actually quite a significant one, the, the the operational requirements for supporting a spot. Um uh you know, for example, BT C or ETX product, um the these operational requirements are actually quite intense. Um OS L is currently working with two of the issuers, so two of the three. so we, we know from firsthand experience um about some of the, the, the um the uh the actual operational requirements. Um and there is a lot um but I would imagine um we are not far away. Um And it's very hard to say what exactly not far away is. But um but maybe, maybe it might be worthwhile to actually look at some numbers. Um the the blueprint for doing spot uh Bitcoin or, or spot crypto ETF S in Hong Kong was first released only four months ago in Hong Kong and it was just before Christmas. It was actually sort of a few days before Christmas. Um So it was sort of like an early Christmas present for the market and um and then barely two months um uh uh barely two months after that. Oh, well, actually sort of about two months ago um the banking regulator um issued um a public document telling banks in Hong Kong that they can potentially custody the crypto products for some of these um uh uh uh for some of these uh products that are going to be launched. So we're talking about a very, very condensed timetable from sort of having 04 months ago to now products, especially when you look at what's happened in the United States. It took 10 years to get an approval for this exact same product. And you're saying over in Hong Kong, it's only been a four month journey. Absolutely. It's, it, it really has been mind boggling. Um It, it, it really is sort of unprecedented speed um to market that we're that we're seeing for these products. And it was um you know, it was yesterday that approval in principle happened for three of these products. Um And just to give you a uh also give you an idea of, of what operational readiness actually means. Um you know, we are talking about also unprecedented infrastructure that have actually been built over this very, very um short space of time. I mean, for, for, for one of these retail products to actually hit the market. Typically, you need someone like um uh uh you know, a major institution typically um a member of a banking institution um operating as a master custodian for these funds. And then because we're talking about spot crypto, we also need licensed sub custodians to hold the crypto assets as well. Um And um and, and so um um in addition, and this is in addition to the, the three asset managers um that have to be approved also by the Hong Kong regulator uh to manage crypto products for the first time. And all three of these managers we know are doing crypto products for the first time um in their history. Um and as well as licensed brokers uh who have to support the um the the, the creation and the redemption processes for um for these funds. So the Hong Kong product also has a special feature which is what what is commonly referred to as in, in, in kind subscription and in kind redemption. So for a Bitcoin product, this means potentially um some of the investors can actually uh give Bitcoin to the uh to the fund as their, as their subscription proceeds um in return for shares or units in the fund. Um And, and they can redeem the same way and that is, that is actually quite a groundbreaking feature that we know in the US products. Um that feature is not supportable. So if I have some Bitcoin, I could give it to the fund and now I have the ETF and then vice versa if I want to switch back. Certainly, I think the um the funds have built in that feature to allow that possibility to occur. Um Obviously, as an ETF I think for the majority of the investors um who are going to get exposure to the fund, it's going to be via the Hong Kong, uh it's going to be via trading on the Hong Kong Exchange. Um And and um and these products going live also imply that um they have lined up a sufficient market makers to actually support the liquidity for the products when they launch as well. So it is actually quite a massive undertaking to, to get these products uh from, you know, from zero to to to live in four months. On that point. Uh I'm curious, I was reading a report this morning that said the approval of the spot Bitcoin ETF S in the United States are actually encouraging more people to just purchase spot Bitcoin, not actually shares of the ETF S. Do you think we'll see the same trend in Hong Kong? I guess. Um if you, if you look at um for example, in the retail market, I think in the current state of play, um there are the, there, there is probably still a very substantial part of the population and this is not just Hong Kong, it's sort of around the globe as well. Um Still a a, you know, a, a substantial part of the populations who are probably more experienced in trading shares and are having securities accounts that allow them to trade shares and funds and other products. Um And so, um there is uh I think there is an inherent advantage when you, when you do something like an ETF that it does bring the product into uh into sort of an easier point of access for people who haven't really touched cry uh crypto um haven't set up their crypto trading accounts with anyone. Uh It means that instead of uh asking them to go to, to go and open um a trading account with a crypto platform, the crypto products are now being brought to them. So I think there is a certain advantage in doing it in the ETF format and, and I think the managers are quite aware of this. Um you know, if you spend months or in the, in the case of the US, if you spend years building the infrastructure, you're not just doing one product, you're doing a pipeline of products. And, and I think the managers are definitely looking at that pipeline. I wanna back up a little bit. OS L is a sub custodian for some of the issuers who have received an in principle approval in Hong Kong. That's a little bit different than how things are over here in the United States. We have custodians that are working with the issuers over here. Talk to me a little bit about your role as a sub custodian. Is it similar to the Coinbase rule with a lot of the issuers over here in the US? So in the US, um the um the cash custodians and the crypto custodians work independent independently from each other. In Hong Kong, the structure that we're that we're seeing is the sub custodian that um that holds the crypto is working under the master custodian from a liability perspective. It's actually quite a groundbreaking um leap if you like. Um certainly for the banking institutions acting as master custodians. Um because um as we know, uh certainly I think for, for us regulated institutions, um a lot of them do see that the s ECs attitude to financial institutions holding crypto risks um is, is, is probably more cautious and conservative. Um And, and that translates into uh into more onerous compliance requirements for us institutions to run a similar structure as well as what we're seeing in Hong Kong. So um so the fact that in Hong Kong, we have um uh at least one banking institution putting their hand up to support the product. Um that, that is actually quite significant. I gotta ask you when these applications were submitted four months ago. Were they only for spot Bitcoin? Because I don't remember hearing anything about a Spot Ether ETF and then all of a sudden a spot Ether ETF kind of popped up out of nowhere. It looks like Hong Kong is going to have that product in, in the coming days or as soon as these final approvals uh come through. Was that a surprise to you or did you know that this was gonna happen throughout the four months? Uh No, we saw it coming. You did. OK. Well, iii I think, I think that highlights a very good point, which is the th this product being Bitcoin Linked or or, or ether linked is inherently a very, very global competition. It's you know, where, where, whether you're doing the product in, in the States or Hong Kong, you're entering a global um competition, it's a global race. Um And the fact that in the US, there are now 11 products um with the same underlying um all of them are passive strategies um with very, very transparent costs. It means for the Hong Kong issuers doing the same product, everyone knows there will be huge pressure on costs, there will be huge pressure on pricing. Um And um and so the managers doing the, the, the, the Bitcoin ETS um definitely from the word go uh would be looking at how do they, how do they gain an edge over over the uh the rest of the global market who are already squeezing into that space? And one of the obvious answers is, well, if the ETX product hasn't launched in, in the US, then then you shift your focus to that part of the race as well to make sure that the Hong Kong managers and the Hong Kong market uh will will at least have some edge uh in, in, in this race. So, so I think that that one is a, is a hugely positive development. So the Ether ETF is uh would you say a competitive advantage? I think so? Certainly for the certainly for the managers um uh you know, spending the considerable time and money to, to, to actually launch a new product with new infrastructure. Um If you're only doing one product which is already in a, in a, in a bit of a tight squeeze around the world, uh you know, the margins are going to be squeezed. So, um so definitely being able to come to, to hit the market with, uh with, with a first, uh would uh would, would certainly help the managers get a bit a bit more of an edge and also give them a bit more of a chance to recoup on their investments. Now, when we talk about the spot Ether ETF here in the United States and I apologize for continuously bringing the comparison up, but that's where I'm sitting. So I'm trying to make sense of it for myself and the rest of the audience here, we the, the topic of Ether as a commodity comes up, commodity versus security. Uh If this spot Ether ETF is approved in Hong Kong, which it sounds like it will be once these technical details are worked out is that the Hong Kong regulator saying that in their eyes, Ether is a commodity. Well, the, the um the Hong Kong laws are also a little bit different um on, on, on this front. Um To be honest, if you're, if you're doing a uh a spot crypto ETF in Hong Kong, um if the, if the underlying is a, is a security that, that in itself is not a deal killer. Um Now what what will be important is actually how the fund actually gets the exposure to the underlying asset. And as it happens, the the the licensed platforms in Hong Kong that are, that are right now that are live and supporting crypto trading um are actually regulated by the securities regulator in Hong Kong. So in theory, and this is a very theoretical position, right? So in theory, if, if Ether was classified as a security in Hong Kong actually from a legal standpoint, um the the the trading platforms can support them without uh without breaching any regulations in Hong Kong. This is not the case in the US. Um the the the biggest um crypto trading platforms um that are um that are regulated in any shape or form in the US at the moment, um are not regulated um under the US securities laws which means that if, if an asset all of a sudden became classified as a security, um then it would, it would actually be illegal for them to, to continue to, to, to allow the product to trade. So, but to be honest, um I think um that that's not really a new question either in, in, in, in the U SI mean that's been uh that's been sort of um debated on and off uh for the for, for the better, better part of the last few years. So um so I think um P putting aside what the US outcome is. Um I think the market has spoken, there is definitely a lot of interest in an ether product. Um and the managers are well aware of that. Ok. And, and the folks listening to the show are very interested in price action. There was a report from Matrix Port recently that said they expect $25 billion of demand to be unlocked once these ETF S are approved in Hong Kong. Do you think that we're going to see the same price action we saw back in January uh when the US ETF S were approved, that's a bit hard to say. But I, I would say maybe let's, let's look at the, let's look at why the managers would spend. Um I mean, e even though sure in Hong Kong, it's a, it's a much shorter time but for the managers, managers to spend so much time and money on a new product, I would, I would say I would bet on the managers if the managers are investing in, in this space, investing in doing a new product, they see upside, they, they, they see demand for the product. Um and ETF S are very expensive to set up. Um So, so unless the managers, at least, at least, you know, took a, took a semi um optimistic view um as a as a as a basic minimum criteria, they wouldn't be doing the products. So II I would I would bet with the managers, I mean, that, that makes good sense to me and Gary just before you wrap up, I started doing this yesterday and it's kind of fun. I know we talked about ETF the whole time, but is there anything else in the crypto markets that you're watching that you are personally passionate about that? I don't know, you want to highlight, OK, I mean, if we look at the, if we look at the um the names that are popping up um for the um for the ETF product or for the spot crypto ETF product in Hong Kong, we do see, we do see some common themes. I mean we are seeing a lot of managers with strong attachments to to, to uh to mainland China and to the Chinese market. To me these these products are making their way in such an unprecedented way at such speed in Hong Kong. It actually does have some pretty pretty important messages for, for, for what these things mean for the Hong Kong crypto market. Um This is not just about expanding the Hong Kong regulated crypto landscape even though you know, even though this does help. But I think what it does mean is it it really does show that um Hong Kong as a does have a pretty unique place within sort of the the the um within the map of China, you know, this tiny little city where we are, we're not just, we we're seeing that it's not just an extension of the mainland capital markets, you know, and not just as a place for mainland companies to raise cash. It really is proving itself to be quite a, you know, truly special financial center where we're seeing some pretty unique financial regulations, unique crypto related infrastructure, unique products and unique innovations can really occur here and with full regulatory support of both of the financial regulators that to me is, is a message that the market should not take lightly. This is actually really big stuff. So I would leave, I, I think I would leave our um leave that with our audience. Gary, thanks so much for joining the show this morning. Thank you.

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