Following the approval of the US Bitcoin spot ETF on January 10, China Asset Management (Hong Kong) announced on April 24 that China Asset Management Bitcoin ETF and China Asset Management Ethereum ETF have been approved by the Hong Kong Securities Regulatory Commission, and will be issued on April 29, 2024 and listed on the Hong Kong Stock Exchange on April 30, 2024. This also marks that Hong Kong, China has become another jurisdiction in the world to approve such products after the United States. It also means that ordinary retail investors can also invest in digital assets by subscribing to such ETFs.
China Asset Management (Hong Kong) has added digital asset management business to its existing traditional asset management business. This is the first time that a Hong Kong subsidiary of a leading Chinese fund company has been approved. Through an exclusive interview with Zhu Haokang, head of digital asset management and head of family wealth management at China Asset Management (Hong Kong), the author will show you the positive progress of Hong Kong in the field of digital assets.
PANews: First of all, congratulations to China Asset Management (Hong Kong) on the approval of its cryptocurrency spot ETF. I would like to ask you to share with us the positive progress of China Asset Management (Hong Kong) in the field of digital assets.
Zhu Haokang: Since the Hong Kong government issued the "Policy Declaration on the Development of Crypto Assets in Hong Kong" on October 31, 2022, we have witnessed a top-down momentum to promote Hong Kong to become a global hub for Web3.0. In March of this year, the Hong Kong Monetary Authority launched three innovative sandbox projects in succession, covering wholesale central bank digital currencies, stablecoins, and the second phase of the pilot program for digital Hong Kong dollars. In addition, Hong Kong's upcoming Bitcoin and Ethereum spot ETFs mark the Hong Kong government's strong support for the compliant development of the crypto asset ecosystem. We at China Asset Management Hong Kong keep up with the pace of the times and actively embrace it. We organize teams to conduct in-depth research on the crypto asset industry, especially product innovations such as real-world asset (RWA) securities tokenization (STO) and Bitcoin/Ethereum spot ETFs, and actively participate in the HKMA's experimental sandbox. We believe that Web3.0 technology has gained increasing recognition in financial innovation. With the future opportunities brought by digital assets entering Web3.0, digital assets have become indispensable in the market, and the development potential of Hong Kong's digital asset industry is huge.
PANews: What special regulations has the Hong Kong Securities and Futures Commission made for the cryptocurrency spot ETF launched in Hong Kong? Compared with the Bitcoin spot ETF approved by the US SEC, what are the advantages and disadvantages of similar ETF products approved by the Hong Kong Securities and Futures Commission? What causes these advantages and disadvantages?
Zhu Haokang: As you mentioned, there are significant differences and advantages in the approach taken by Hong Kong regulators compared with the United States. A key difference is that Hong Kong allows both cash and in-kind subscriptions. Under these rules, participating dealers can subscribe or redeem shares of the ETF directly using Bitcoin or Ethereum, whereas in the United States such subscriptions and redemptions can only be done with cash. While the U.S. spot Bitcoin ETF market is currently larger than Hong Kong’s, the latter may have an advantage as Hong Kong was one of the first jurisdictions to approve a spot Ethereum ETF and allow retail participation.
These innovative initiatives are backed by a strict regulatory framework designed to protect retail investors. The Hong Kong Securities and Futures Commission (SFC) has established a regulatory framework for crypto asset funds, as outlined in its December 2023 circular. The SFC noted that fund management companies must have a good regulatory record and can only invest in crypto assets listed on SFC-licensed crypto asset trading platforms (VATPs) that are open to the Hong Kong public. In addition, these funds are prohibited from having leveraged exposure at the fund level. In terms of custody, the SFC stated that the trustee or custodian of the fund should only entrust its cryptocurrency custody functions to SFC-licensed VATPs, or institutions that meet the cryptocurrency custody standards issued by the Hong Kong Monetary Authority (HKMA), which are subject to strict supervision.
PANews: The US SEC did not approve physical subscription and redemption of spot ETFs due to concerns about possible illegal activities. What kind of institutional design has Hong Kong made in this regard to prevent possible money laundering and other illegal activities?
Zhu Haokang: The regulatory and licensing framework currently implemented in Hong Kong emphasizes strict compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) and Know Your Token (KYT) standards. These frameworks establish strict rules to protect investors, including secure asset storage, meticulous KYC/KYT procedures, AML supervision, and Counter-Terrorist Financing (CFT) measures. As a result, these regulations impose strict obligations on all market participants to prevent illegal financial activities. However, in the United States, regulatory oversight such as safeguards for crypto asset trading platforms and custodians is not fully regulated.
PANews: What is the current market trend for Hong Kong cryptocurrency ETFs? Which investors can buy such products?
Zhu Haokang: Qualified investors, institutional investors, retail investors and qualified international investors in Hong Kong can invest in cryptocurrency ETFs. Currently, mainland Chinese investors are not allowed to invest in Hong Kong's cryptocurrency ETFs. For specific investor qualifications, you can consult brokers and sales channels, and continue to pay attention to whether there will be corresponding regulatory adjustments or specific regulatory frameworks in the future.
PANews: Bitcoin has recorded its seventh consecutive month of growth. How do investors currently view digital asset investments?
Zhu Haokang: Research and decision-making on any investment are complex, especially in the emerging asset field of digital assets. I have created a 3D theory of digital assets for everyone to correct and exchange, and Defensive, Diversification, and Decision, respectively, to help everyone analyze digital asset investment from three perspectives: investment risk defense, investment portfolio diversification, and investment decision-making. Take Bitcoin as an example. Bitcoin was born in the context of the global financial crisis in 2008. Since then, the global financial market has experienced events such as the European sovereign debt crisis, special liquidity response measures by global central banks in response to the new coronavirus, and the collapse of major regional banks in the United States. Investors' awareness of asset risk defense has increased significantly. Bitcoin is the first digital, independent, global, rules-based currency system in history. Its decentralization should theoretically mitigate the systemic risks of the traditional financial system, and Bitcoin’s price volatility decreases over time. Although only 15 years old, Bitcoin's price has performed well during risk-off periods. For example, last year's performance in the regional bank failure crisis in the United States is a striking example. In early 2023, during the historic collapse of U.S. regional banks, Bitcoin’s price rose by more than 40%, highlighting its role as a hedge against counterparty risk. Although Bitcoin has historically experienced declines, the setbacks it has experienced are industry-specific. For example, the last major decline in Bitcoin was due to the collapse of the FTX exchange in 2022 due to fraud. In every past cyclical decline, Bitcoin has proven its antifragility, reaching new highs.
Bitcoin’s unique characteristics make it significantly different from other traditional assets: scarcity, liquidity, divisibility, portability, transferability and fungibility, auditability and transparency, etc. From a 5-year perspective, between 2018 and 2023, the correlation between Bitcoin returns and traditional asset classes averaged only 0.27. Importantly, Bitcoin returns have a correlation of 0.2 and 0.26 with returns on gold and bonds, two traditional safe-haven assets, respectively. And the correlation between bonds and gold is as high as 0.46. We look at it from a 10-year perspective. From 2014 to 2023, the Nasdaq 100 index, which has the highest correlation with Bitcoin, is only 0.19, and its correlation with the returns of gold and bonds, two traditional safe-haven assets, is even greater. as low as 0.06 and 0.02. Therefore, the correlation between the returns of Bitcoin as an investment portfolio and the returns of other asset classes is low, and it can achieve good portfolio diversification.
As a revolutionary technology and emerging asset, Bitcoin’s speculative nature and short-term volatility make its investment decisions complex and changeable. Bitcoin’s market capitalization has now exceeded $1 trillion, increasing its purchasing power while maintaining its independence. Investment decisions are mainly about timing and price selection, and Bitcoin has outperformed all other major asset classes in the short and long term. According to ARK Investment Management LLC based on data and calculations from PortfolioVisualizer.com, as of March 31, 2024, the annualized return on investment in Bitcoin has been close to 60% over the past 7 years, while the average return on other major assets is only 7%. According to the classic modern 60/40 portfolio (i.e. 60% stocks + 40% bonds), the portfolio with the largest proportion of Bitcoin investment has performed best over the past 5 years.
Source: ARK Investment Management LLC, 2024, based on data and calculations from PortfolioVisualizer.com, Bitcoin price data from Glassnode as of March 31, 2024.
Any investment has risks, and digital assets are no exception, such as digital asset ETF concentration risk, industry risk, speculative risk, unforeseen risk, extreme price volatility risk, ownership concentration risk, regulatory risk, fraud, market manipulation and security vulnerability risk, network security risk, potential manipulation of the Bitcoin network risk, fork risk, illegal use risk, and trading time difference risk. When investing in digital assets or their related products such as ETFs, investors should consider their investment objectives, risk tolerance, and market volatility. The high volatility of the cryptocurrency market means high risk and high return coexist.
PANews: What is the management capability of China Asset Management (Hong Kong)’s cryptocurrency ETF and what is the possible scale of capital inflows into the Hong Kong cryptocurrency ETF in the initial stage?
Zhu Haokang: China Asset Management has 26 years of asset management experience. It is the largest ETF issuer in China and a pioneer in the Chinese fund industry. It is also the earliest established fund management company in China and has issued China's first ETF. As of the end of March 2024, the scale of management exceeded RMB 2.15 trillion (approximately US$300 billion), ranking first in China for 18 consecutive years, accounting for more than 22% of the ETF market in mainland China[1]. In addition to its absolute leading position in China, China Asset Management's brand influence has expanded to the global market. According to the report of ETFGI, a world-renowned financial consulting agency, at the end of 2023, China Asset Management was ranked as the world's top 19 ETF issuer, and it is the only ETF issuer in China to enter the top 20.
China Asset Management (Hong Kong) is a wholly-owned subsidiary of China Asset Management. It has been established in Hong Kong for 16 years and has won 90+ authoritative industry awards. It is a top Chinese fund company in Hong Kong with strong strength and high trust. It manages several of the world's largest or Hong Kong's largest ETFs in the overall ETF market in Hong Kong:
The world's largest offshore CSI 300 ETF
The world's largest Hang Seng ESG ETF
The largest Nasdaq 100 ETF in Hong Kong
The largest Japanese stock ETF in Hong Kong
The largest European stock ETF in Hong Kong
The largest biotech ETF in Hong Kong
The largest MSCI A50 ETF in Hong Kong
Whether it is investment managers, capital markets, operations, trading, sales, compliance and other departments, all have experience working in world-renowned asset management companies, which ensures that we operate and manage smoothly and efficiently, and our team is very stable and has close cooperation. The rich custody, trading, market maker and other resources we have accumulated over the past 16 years are unmatched by other companies. The past decade of experience has also verified that China Asset Management Hong Kong has obvious advantages in managing the core influencing factors of ETFs, including 1) liquidity, 2) tracking error, 3) premium and discount, and 4) bid-ask spreads, in addition to ensuring fast subscription and redemption and stable operation. Especially for complex and innovative products such as spot Bitcoin and Ethereum ETFs, the management and operation capabilities of ETF issuers will be greatly tested. We are full of confidence in ourselves. We believe that China Asset Management Hong Kong's strong team strength, 16 years of management experience and our accumulated brand influence in the Hong Kong market can live up to market expectations.
We observed that the Bitcoin spot ETF managed by the largest asset management company in the United States had a size of only US$10.45 million when it was first launched on January 10 this year. By April 25, the size of the ETF had soared to US$17.2 billion, an increase of about 1,700 times in just three months. This comparison not only shows the huge market potential for traditional investors to enter digital assets, but also highlights Hong Kong's competitive advantage in the global digital asset field. As one of China's largest public asset management companies, China's largest ETF issuer and Hong Kong's top Chinese fund company, we at China Asset Management (Hong Kong) are confident in Hong Kong's future in digital asset innovation and Web3.0 development.
Unless otherwise specified, data is from China Asset Management (Hong Kong), Bloomberg, Wind, as of April 29, 2024.
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