Author | TaxDAO
Since the U.S. Securities and Exchange Commission approved the listing of the first 11 spot Bitcoin ETFs on January 10, Hong Kong’s financial market has also made new progress in incorporating virtual assets. It was recently reported that the Hong Kong Securities Regulatory Commission is accelerating the review of the first Hong Kong Bitcoin spot ETF and plans to list it on the Hong Kong Stock Exchange after the Spring Festival.
This article will analyze Hong Kong futures Bitcoin ETF regulatory policies, the current status of existing virtual currency futures ETFs, and the tax policies for investing in Bitcoin futures ETFs in Hong Kong and Singapore. It will present the current development environment of Hong Kong Bitcoin ETFs from multiple perspectives and pay attention to Hong Kong’s attitude towards spot Bitcoin ETFs. Discuss the future development trends of Hong Kong cryptocurrency ETFs.
1. Hong Kong Futures Bitcoin ETF Regulatory Policy
On October 31, 2022, the Hong Kong government issued a policy declaration on the development of virtual assets in Hong Kong, clarifying the government’s policy stance and guidelines for the development of a dynamic virtual asset industry and ecosystem in Hong Kong. At the same time, the Hong Kong Securities and Futures Commission issued a circular on virtual asset futures exchange-traded funds (ETFs), considering the authorization of exchange-traded funds (ETFs) regulations that are publicly offered in Hong Kong mainly through futures contracts. The "Circular on Funds Recognized by the China Securities Regulatory Commission for Investment in Virtual Assets" issued on December 22, 2023 replaced and updated the "Circular on Virtual Asset Futures Exchange Traded Funds". The document specifically clarified that virtual assets account for more than 10% of public fund products have relevant requirements in terms of management companies, investment in virtual asset tokens, subscription and redemption of virtual assets, investment strategies, fund custody, spot virtual asset valuation and service providers.
1.1 Conditions for convening issuance
① Issuer qualifications: For companies that manage virtual asset funds (virtual assets account for more than 10% of the fund), the management company must have a good compliance record, and at least one employee of the company must have experience in managing virtual assets or related products. Management companies must meet existing or new requirements for virtual asset management companies by licensing regulators and need to hold an upgraded No. 9 license. That is, the issuing company needs to meet the "Terms and Conditions for Licensed Issuance Registration Institutions Applicable to Management of Investment Portfolios Investing in Virtual Assets."
② Custody institution: In terms of custody institutions, virtual asset funds recognized by the Hong Kong Securities Regulatory Commission must use virtual asset platforms or financial institutions recognized by the Hong Kong Securities Regulatory Commission for virtual asset custody. Relevant virtual asset platforms or financial institutions must meet the requirements of the Hong Kong Monetary Authority for custody institutions. Similar to trading, virtual assets require independent third-party custody, and the custodian must be a licensed exchange in Hong Kong or a financial institution and its affiliates recognized by HKMA. In addition, it also needs to meet:
Custody accounts must be separated from the asset management company’s own accounts;
Most assets are placed in cold wallets, and a small amount are placed in hot wallets for redemption;
The private key is kept securely and requires that the private key must be kept in Hong Kong to effectively prevent external attacks and have appropriate backups.
③ Service providers: In terms of service providers, the Hong Kong Securities and Futures Commission requires that virtual asset fund management companies should ensure that all necessary service providers (such as fund managers, market makers and index providers, etc.) must have the requirements of the Hong Kong Securities and Futures Commission. Relevant qualifications for virtual asset fund operations and services.
④Investment strategy requirements: In terms of futures investment, the Hong Kong Securities and Futures Commission pointed out that companies that manage virtual asset funds must ensure that relevant virtual asset futures have sufficient liquidity. At the same time, the roll cost of related virtual asset futures is controllable, and virtual asset fund companies should elaborate on the management methods of these roll costs. For funds that mainly use futures investment strategies, the Hong Kong Securities and Futures Commission stated that virtual asset funds authorized by the Securities and Futures Commission should adopt active investment strategies to make the investment portfolio flexible (such as futures position diversification, multiple expiration dates), and at the same time Have rollover strategies and the ability to respond to any market disruption events. At the same time, in terms of leveraged investment, the Hong Kong Securities and Futures Commission clearly stated that virtual asset funds authorized by the Securities and Futures Commission are not allowed to invest in virtual assets on a leveraged basis at the fund level.
⑤Virtual asset valuation: In terms of virtual asset valuation, the Hong Kong Securities and Futures Commission pointed out that for the valuation of virtual assets, virtual asset fund management companies authorized by the Securities and Futures Commission should adopt trading methods based on major trading platforms (that is, by a method that can reflect the basic A large share of spot trading activity, a benchmark index published by a reputable provider) for valuation.
⑥Risk disclosure and investor education: The "Circular" requires issuers to disclose risks in all aspects in issuance documents and financial reports, and also requires issuers and distributors to conduct investor education before launching products.
⑦Audit system: According to the requirements of the "Circular", funds that prepare to issue or plan to invest 10% or more of the total asset value of the fund in virtual currencies must consult the Hong Kong Securities Regulatory Commission in advance and obtain approval.
1.2 Conditions for investors to invest
At present, the Hong Kong government has legislated on cryptocurrency trading. Only exchanges in Hong Kong that have obtained a license from the Hong Kong Securities Regulatory Bureau can legally trade cryptocurrency. Since ETFs do not count as direct purchases of virtual currencies, under Hong Kong’s current laws, cryptocurrency ETFs are instead regarded as fund regulations. Therefore, as long as they are legally listed on the Hong Kong Securities Regulatory Commission and the Hong Kong Stock Exchange, they can be purchased through legal channels. .
As far as the current trading methods in Hong Kong are concerned, anyone who buys ETFs needs to purchase fund units with a specific minimum limit, and different entry thresholds will cause different buying and selling costs. For example, the entry threshold for the Samsung Bitcoin Futures Active ETF is 50 fund units, while the CSOP Bitcoin Futures ETF (3066.HK) has an entry threshold of 100 fund units. At the same time, there are investor restrictions in Hong Kong. According to the requirements of the "Joint Circular", the sales of virtual asset-related products must comply with the requirements of the relevant jurisdictions, that is, virtual asset spot ETFs are prohibited from being sold to investors in mainland China. Products related to virtual assets are not offered or sold directly or indirectly in Mainland China to, or for the benefit of, legal persons or natural persons in Mainland China. Legal persons or natural persons in Mainland China are not allowed to purchase Bitcoin ETFs, directly or indirectly, without first obtaining all necessary government approvals from Mainland China.
2. Hong Kong’s existing futures Bitcoin ETF
HSBC Hong Kong has recently opened the following three ETFs, which have been approved for listing on the Hong Kong Stock Exchange: CSOP Bitcoin Futures ETF, CSOP Bitcoin Futures ETF, and Samsung Bitcoin Futures ETF.
2.1 CSOP Bitcoin Futures ETF
CSOP Bitcoin Futures ETF is a Bitcoin ETF and is the first Bitcoin futures ETF in Hong Kong. The investment tracking object is the Bitcoin futures contract on the Chicago Mercantile Exchange in the United States. The issuer is CSOP Asset Management Co., Ltd. It will be listed on December 16, 2022. The current minimum entry threshold is 100 fund units. Its asset size as of February 1, 2024 was 30.8 million USD, the share size was 13.89 million units, and the net asset value per unit was US$2.2175. CSOP Bitcoin Futures ETF management fees (including trustee fees, custody fees and administrative fees) are 1.99% per annum, and the full-year recurring expense ratio is estimated to be 2.0%. The fund has increased by 131.00% since its inception, 62.08% in the past year, and 1.03% in the past month.
2.2 CSOP Ethereum Futures ETF
CSOP Ether Futures ETF is an Ether ETF. The investment tracking object is the Ether futures contract on the Chicago Mercantile Exchange in the United States. The issuer is CSOP Asset Management Co., Ltd. It was listed on December 16, 2022. It is currently at the lowest The entry threshold is 100 fund units. Its asset size as of February 1, 2024 was 12.09 million USD, the share size was 7.24 million units, and the net asset value per unit was US$1.6709. CSOP Ethereum Futures ETF management fees are 1.99% per year, and the full-year overhead ratio is estimated at 2.0%. The fund has increased by 71.07% since its issuance, 80.16% in the past year, and 11.29% in the past month.
2.3 Samsung Bitcoin Futures ETF
Samsung Bitcoin Futures ETF is a Bitcoin ETF. The investment tracking object is the Bitcoin futures contract on the Chicago Mercantile Exchange in the United States. The issuer is Samsung Asset Application (Hong Kong) Co., Ltd., which was listed on January 13, 2023. The current lowest price is The market threshold is 50 fund units. Its asset size as of February 1, 2024 was US$10.14 million, share size was 4.75 million shares, and net asset value per unit was US$2.12. The CSOP Bitcoin Futures ETF management fee is 0.89% per year, and the annual recurring expense ratio is estimated to be 2.0%. The fund is up 96.70% since launch.
3. Tax treatment for Hong Kong and Singapore residents investing in Bitcoin ETFs
The taxation of Bitcoin ETFs at the lower level is roughly the same as that of other ETFs, involving capital gains tax, income tax, and withholding tax. The specific taxation is related to factors such as its place and type of registration, the investor's residence, and the jurisdiction where the investment target is located. In the sale and redemption of ETFs, the sale is a capital gains tax event, while the redemption is not a taxable event and does not require tax; at the same time, investing in Bitcoin ETF dividends in other countries or regions will involve withholding taxes.
3.1 Tax treatment for Hong Kong residents investing in futures Bitcoin ETFs
Hong Kong levies tax on a territorial basis and only taxes profits and income from Hong Kong. At the same time, Hong Kong does not tax capital gains obtained by companies and individuals. However, if the shareholding period is short, the capital gains from the sale of equity will be regarded as transactional in nature, and thus a profits tax will be levied. Therefore, when Hong Kong residents obtain price difference income from selling Bitcoin ETFs, they generally do not need to be levied profits tax. At the same time, Hong Kong residents generally do not need to pay tax on Bitcoin ETF dividends received in Hong Kong.
Hong Kong companies are levied profits tax on the spread income they receive from selling Bitcoin ETFs. The profits tax rate for investor corporations is 8.25% on the first HK$2 million and 16.5% on subsequent assessable profits. For non-incorporated persons engaged in sole proprietorship or partnership business, the two-tier profits tax rates are 7.5% and 15% respectively. At the same time, corporate investors generally do not need to pay taxes on dividends received when investing in Bitcoin ETFs.
3.2 Tax treatment for Singapore residents investing in futures Bitcoin ETFs
Singapore and Hong Kong do not tax capital gains obtained by companies and individuals. However, for anti-tax avoidance considerations, capital gains from the sale of equity interests will be taxed as business income if the holding period is short, and gains from the sale of equity interests will not be taxed if the holding period exceeds 20% and the holding period exceeds 24 months. At the same time, dividends paid by Hong Kong companies to non-residents do not need to pay withholding tax. Therefore, dividends and dividends received by Singapore residents or companies investing in Hong Kong Bitcoin ETF do not need to deduct withholding tax.
At the investor level, Singapore also implements the territorial source principle and only taxes income generated in or sourced from Singapore. However, the Singapore Income Tax Law provides that income generated outside Singapore is also deemed to be “Singapore source” if it is remitted, transmitted or brought into Singapore.
Individual investors who remit their income from investing in Hong Kong Bitcoin ETFs into Singapore will generally have to pay personal income tax on this income. Personal income tax in Singapore for 2024 ranges from 0% to 24%, depending on an individual’s taxable income.
Singapore resident companies have tax exemptions for dividend income from overseas sources if: (1) When the income from overseas sources is received in Singapore, the highest corporate tax rate (title tax rate) of the overseas country that generated the income is at least 15 %; (2) the income has been taxed overseas; (3) the authorities believe that tax exemption will be beneficial to the resident company.
4. Spot Bitcoin ETF dynamics
Hong Kong will approve futures-based cryptocurrency ETFs in 2022. Currently, there are three listed products: CSOP Bitcoin Futures, CSOP Ethereum Futures and Samsung Bitcoin Futures. Their asset scale is relatively small, with each fund’s AUM less than 1 One hundred million U.S. dollars.
In December 2023, the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority issued a circular stating that they were ready to accept applications for authorization of virtual asset spot ETFs. This means that Hong Kong is becoming the first market in Asia to allow the listing of virtual asset spot ETFs.
On January 26, 2024, Harvest Fund Hong Kong Company has submitted a Bitcoin ETF application to the Hong Kong Securities Regulatory Commission, becoming the first institution in Hong Kong to submit a Bitcoin spot ETF application. According to media reports, the Hong Kong Securities Regulatory Commission hopes to speed up the approval of the first Hong Kong Bitcoin spot ETF and plans to list the first Hong Kong spot Bitcoin ETF on the Hong Kong Stock Exchange after the Spring Festival. The Securities and Futures Commission of Hong Kong may follow the practice of the United States, which is to approve applications from several companies at once. As of now, apart from Harvest Fund, no other institution has submitted an application. Although institutions including CSOP have communicated with the Hong Kong Securities Regulatory Commission many times, they have not submitted it yet.
With the development of Bitcoin compliance and the continuous improvement of market maturity, the launch of Bitcoin spot ETF has achieved a close connection between the traditional financial market and the virtual asset market, marking the structured financial market opening the door to the virtual asset field. Standardize financial products for Bitcoin in the form of spot ETFs. Bitcoin spot ETF provides investors with a more convenient and standardized investment method, while improving the effective operation of the market and more effective risk management and investor protection.
