The race to launch Hong Kong’s first retail crypto futures ETF is on

Exchange-traded fund providers are busy filing applications to launch retail-focused crypto futures ETFs after the local regulator said it would open the door to such products.

Being among the first to list a retail crypto futures ETF on the local exchange will be particularly critical to the product's success given the narrow range of eligible underlying assets outlined in a Securities and Futures Commission circular, experts said.

The announcement attracted “a lot of interest, a lot of noise,” according to Rocky Mui, a Hong Kong-based partner at law firm Clifford Chance who has worked closely with issuers in the ETF industry.

Richard Douglas, chief executive of Saxo Markets in Hong Kong, said his company has a wide range of third-party crypto exchange trading products available to professional investors and hopes to offer a number of them to retail investors in Hong Kong.

The Saxo website lists some 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 within the existing definition as set out [in the SFC circular] and will therefore be filing shortly,” Douglas said.

Fidelity International, which last month became the first major global fund house to offer a physical Bitcoin-backed ETP to Hong Kong professional investors, declined to say whether it has specific plans to file for a retail crypto futures ETF.

According to Emma Pecenicic, head of digital offerings and partnerships for Asia Pacific, ex-Japan, the company is closely monitoring cryptocurrency developments as part of a broader exploration of the potential for digital assets.

Vivien Wong, general manager at virtual asset fund New Huo Asset Management, said the company is in discussions with ETF-specific asset managers about possible collaborations to launch a retail crypto futures ETF in Hong Kong.

Joy Lam, virtual assets specialist at Hong Kong law firm Baker McKenzie, said there has been strong interest from managers to launch crypto vehicles in Hong Kong for some time.

“Probably about 15 months ago, we first started getting calls from some of the more traditional fund managers about the possibility of crypto ETFs and other crypto-focused products,” Lam said.

The SFC circular states that asset managers seeking regulatory approval must demonstrate at least three years' proven experience in managing ETFs. As a result, many players are now seeking partnerships between an established traditional asset manager and a new crypto-focused company.

“The truth is that many of the crypto-native or crypto-focused fund managers don’t really have the retail fund experience required to do this,” Lam said.

On the other hand, when it comes to crypto expertise, not many traditional asset managers have the necessary balance sheet or people on their teams with "significant experience" investing in virtual assets to navigate market dislocations, she said.

The bigger challenge for players looking to launch a retail crypto futures ETF are the restrictions set by the SFC on what these funds can invest in, with only Bitcoin futures and Ether futures traded on the Chicago Mercantile Exchange permitted.

Experts question how many products the Hong Kong market can really support when the range of eligible underlying assets is so narrow.

“With this narrow range in terms of your investment size or strategy, if you are not among the first couple to be approved, it will be very difficult,” Lam said.

Fund firms could also face competition from foreign players drawn to Hong Kong due to the SFC's openness to retail crypto products.

Lam has fielded calls from a small number of foreign companies that have launched products in the United States and Europe but do not have a presence in Hong Kong or Asia.

“When they saw the news that Hong Kong wanted to allow crypto futures ETFs, they were on the phone very quickly,” she said.

*Ignites Asia is a news service published by FT Specialist for professionals working in the wealth management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available atignitesasia.com.