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Hong Kong Bitcoin ETFs Coming Soon, Arthur Hayes Highlights Arbitrage Opportunity

At least 10 funds are exploring Bitcoin ETFs in Hong Kong but could its regulatory framework provide an opportunity for arbitrageurs? Arthur Hayes thinks so.

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The U.S. Securities and Exchange Commission's (SEC) decision to approve Bitcoin ETFs was a historic milestone for the country's TradFi and crypto industries alike.

Now, other jurisdictions are observing how the decision is unfolding in the US, to draw inspiration for their own regulatory frameworks.

Ripple's APAC policy director, Rahul Advani, told Blockhead that the spot Bitcoin ETF approvals could encourage other regulators to greenlight similar products.

"Hong Kong's SFC released a circular a few weeks ago indicating that they are open to retail-focused ETFs being listed in Hong Kong," he said. "It'll be interesting to see how this will impact the industry in the medium term. For the long term, it is positive for the industry."

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South Korea's government is pressuring its regulator to reconsider approving Bitcoin ETFs too. Sung Tae-yoon, the chief of staff for policy of the presidential office, said the South Korean government is looking to introduce foreign affairs into local regulations. The announcement is thought to be linked to crypto ETFs.

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HK Wen?

According to OSL's executive director and head of regulatory affairs Gary Tiu, Hong Kong could see its first crypto ETFs within a few months.

Tiu told local media that five to ten companies are studying such ETFs, with five progressing further than others. He added that there is pressure on the fund creators to maintain low competitive fees for these products.

“These ETFs offer several crucial benefits, including promoting orderly markets for underlying digital assets, establishing a model for local investor protection, and accelerating integration between regulated digital asset platforms and traditional financial institutions,” Tiu said to The Block.

There are currently only two licensed exchanges in Hong Kong: OSL and HashKey. The latter also believes ten companies are exploring launching crypto ETFs.

Last week, Venture Smart Financial Holdings (VSFG) revealed plans to launch a Bitcoin ETF in Q1. “It’s a market that has huge potential,” The Hong Kong-based financial service's group head of investment and product, Brian Chan, said.

VSFG aims to reach $500 million in assets under management by the end of this year and is working to apply with Hong Kong’s Securities and Futures Commission (HK SFC) for its Bitcoin ETF.

In December, the SFC announced its openness to the evolving virtual asset market by inviting applications for Virtual Asset Spot Trading Exchange Traded Funds (Virtual Asset Spot Trading ETFs).

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HK How?

Hong Kong's crypto ETF embrace comes as part of a larger regional shift towards embracing the potential of digital currencies and blockchain technology, highlighted by recent revelations from China about its renewed focus on the crypto industry.

The SFC has also stated that approved funds will have the ability to directly invest in virtual asset tokens. These tokens must be permitted for retail trading on exchanges that comply with Hong Kong’s regulatory standards.

This provision is a major step towards integrating virtual assets into the broader financial system, offering investors regulated avenues to engage with this emerging asset class.

BitMex founder Arthur Hayes said China will most likely follow in America's footsteps regarding crypto ETFs.

"China will launch an exact copy of the US-listed ETF in the Hong Kong financial markets to capture flows within China and the Asia Pacific," Hayes wrote in a recent blog. "Pax Americana leads, and her frenemies shall follow."

However, he also highlighted that Hong Kong's regulatory structure could cause complications.

"Obviously, if the ETF is wildly successful, price discovery could move from East to West. But don’t forget about Hong Kong and its copycat ETF products. Hong Kong will only allow its listed ETFs to trade on regulated exchanges in Hong Kong. Binance and OKX might service this market. But new exchanges will be spun up to service this China southbound flow," he explained.

Nonetheless, Hayes noted that arbitrageurs monitoring markets in the East and West will stand to gain.

"Whatever happens in New York and Hong Kong, neither city will allow fund managers to trade Bitcoin at the best price, but they may only trade on “select” exchanges. This unnatural state of play only serves to create more market inefficiencies from which we, as arbitrageurs, can profit," he said.

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