Hong Kong’s venture into the virtual asset ETF market is facing obstacles, as traditional banks remain cautious due to regulatory issues and a lack of expertise.
More than a month after the introduction of Hong Kong’s virtual asset spot ETF, banks are still sitting on their hands.
Banks got way more rules
Chris Barford, Head of Financial Services Consulting at Ernst & Young Hong Kong, explained that banks are hesitant due to concerns over anti-money laundering (AML) and know-your-customer (KYC) regulations, and the shortage of experienced staff also plays a role in their concerns to offer these products to the investors.
While mainstream brokerages have taken on the distribution of virtual asset spot ETFs, because they can without any issues, banks are regulated differently and must undergo thorough compliance checks and obtain specific permissions before they can start trading ETFs.
Despite the problems, institutional investors are showing a growing interest in virtual assets, drawn by the potential for huge returns despite market volatility. Or because of market volatility.
An Ernst & Young survey noted that many institutional investors plan to increase their allocations to virtual assets over the next two to three years.
Attractive markets, but where are the buyers?
The trading volume of crypto ETFs in Hong Kong remains relatively low.
For example, the China Bitcoin ETF has seen an average daily transaction volume of just 1,557 since its launch in April, which is way-way lower compared to similar products in the United States.
Barford pointed out that, despite these lower trading volumes, the regulatory stability in Hong Kong’s market makes it attractive to investors, as the strict regulatory reviews and approvals provide a secure investment environment, helping to protect investors from fraud and cybersecurity threats.
The interest is growing
As interest in virtual asset investments grows, traditional financial institutions are exploring the use of technologies for payment, settlement, and custody too.
Tokenization, in particular, is gaining attention, and institutions like HSBC are starting to tokenize assets, such as gold, for retail investors in Hong Kong, where gold investment is traditionally really popular among the people.
Barford predicts that tokenization could expand to include other assets, like real estate, making it easier for more investors to own a stake in these assets.
