Since the listing of the first Bitcoin (BTC) futures Exchange Traded Fund (ETF) in the United States (US) in 2021, there has been a global trend to apply for the listing of virtual assets (VA) futures and spot ETF. There is increased market attention towards VA ETF.

What is the competitive advantage of VA ETFs?

Instead of directly purchasing and holding VA, VA ETFs also pave the way for investors to enter the VA market. At present, the US has successfully approved the listing of three BTC futures ETFs. BTC spot ETF, a more cutting-edge investment product, is approved and listed in Canada and Australia.

According to a survey conducted by Nasdaq with VA investment advisors, 72% of the respondents said they are willing to allocate a higher proportion of clients’ assets in VA if a BTC spot ETF is approved and listed in the US. Among respondents who have invested in VA, 86% expects to increase their allocation in VA in the next 12 months.

Why do investors prefer VA ETFs?

Extended from the concept of traditional ETF: Developed from the concept of traditional ETFs, both VA futures ETF and VA spot ETF are more acceptable to traditional investors and can be traded through traditional exchanges.

Easy to trade: Direct purchase of VA requires the use of Stablecoins. ETFs can be easily subscribed to and redeemed by using fiat currencies.

At present, dozens of financial institutions in the US are still waiting for the SEC’s approval for their issuance of VA and its related ETFs. The regulator needs to conduct a careful assessment to identify and evaluate the relevant risks associated with the applicants and their ETF, in order to provide pre-emptive protection to the investors.

“The approval of VA and its related ETFs is a remarkable step for both regulators and market participants around the world. If the product design and risk control are guided and supervised by the regulator, we expect more innovative products will be launched. This will open up the VA investment doors for the market.” General Manager of Huobi Asset Management (Hong Kong) Limited, Vivien Wong said.

After a recent bout of market turmoil, both policymakers and market participants have highlighted the importance of compliance in the financial market. In the long run, once VA-related ETFs, mutual funds and hedge funds are approved, the policy risks will be minimized.

VA funds in Hong Kong

VA and its related ETFs are at their early stage of development, but the soaring market enthusiasm has accelerated the institutional entry into the market. The listings of VA spot ETFs in Canada and Australia have written a paradigm of industry innovation. The market demand in long term is expected to continue to increase.

VA ETF has not yet been approved and issued in Hong Kong. However, there are similar fund products available in the market. The market currently offers passive funds (with a single VA) as well as actively managed VA funds. For professional investors who wish to invest in VA, they may consider investing in those funds managed by an asset manager that has obtained approval from the Securities and Futures Commission of Hong Kong (HKSFC) to conduct Type 9 (Asset Management) regulated activities and to manage portfolios that invest 100% in virtual asset. These funds are not only managed by the experienced VA investment managers, but also are required to comply with the “Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets” published by HKSFC on 4^th October, 2019. These funds are subject to strict requirements in the due diligence on the VA vendors and counterparties.

Since the VA market is still at its early stage, subscribing to compliant VA funds can effectively reduce the risks caused by market information opacity, and through professional risk assessment by a regulated fund manager, suitable VA fund products can be identified for the investors.

“Being compliant is an irresistible trend in the VA industry, so right after we have obtained the HKSFC’s approval to conduct Type 4 (Advising on securities) and Type 9 (Asset management) regulated activities, and to manage portfolios that invest 100% in VA, we have launched the Bitcoin (BTC) tracker fund, Ethereum (ETH) tracker fund and Hong Kong 1^st actively-managed VA fund for professional investors.” Vivien also added, “Compliance and innovation will play a pivotal role in defining the future of the VA market.”