Hong Kong’s preliminary approval of spot ether exchange-traded funds could give the region a competitive edge over the U.S. in the retail spot ETF market, an OSL executive said.

Gary Tiu, executive director and head of regulatory affairs at OSL, said in an interview with The Block on Monday that the in-principle approval of spot ether products was “absolutely spot-on.”

“Right now, the U.S. has not approved any spot ETH -3.81% products. So the Hong Kong managers are certainly standing in a very good position when they launch the ETH products in Hong Kong for sure,” Tiu said.

Tiu’s comments come after the Hong Kong Securities and Futures Commission today gave the in-principle approval to a slew of spot bitcoin and ether ETFs, including those in which OSL acts as a sub-custodian and infrastructure service provider.

"Hong Kong's approval of the spot ether ETFs comes ahead of a US decision, and is a significant milestone in Hong Kong's journey to become a leading crypto hub," said Angela Ang, a former regulator at the Monetary Authority of Singapore and senior policy advisor at blockchain intelligence firm TRM Labs. "With fewer alternatives for Ethereum exposure, we might see the ether ETFs attract more investor interest."

‘Very, very close’ to launch

Tiu explained that the SFC’s in-principle approval typically means that the most important parts of the vetting processes are complete.

“From a technical standpoint, this means those products are pretty close to being ready to go live,” Tiu said. “But maybe there are still some technical conditions they need to satisfy before they can launch the public offering.”

“Typically, with the product authorization, if they already have in-principle approval, it means we are getting very, very close,” he added.

Mainland investors not allowed via Stock Connect

Some in the crypto industry have said that the upcoming Hong Kong spot crypto ETFs may attract substantial investor interest from the Chinese mainland through the Southbound Stock Connect program. However, this argument may be weak as the Stock Connect program currently does not allow mainland investors to invest in crypto futures ETFs in Hong Kong — let alone spot crypto counterparts.

“I don't believe any of these [crypto ETF] products have been included in the eligible securities list [of the Stock Connect program] yet, but I think the possibility or at least the potential for such inclusion is something that the market certainly likes,” Tiu said, adding that in the immediate short term, “the position has not been made clear by any regulators on this.”

“Day one, I don't believe these products have been included or will be immediately included. But I think certainly the market is optimistic that there is a chance or a potential for inclusion in the future.”

Fee war?

The U.S. approval of spot bitcoin ETFs earlier this year triggered a fee war among asset managers to stay competitive. A similar competition in fees and costs may follow when the Hong Kong counterparts officially launch, according to Tiu.

“There will [be a fee war] for sure,” Tiu said. “We are talking about multiple products from multiple issuers launching at the same time, but tracking the same underlying asset. The ability to offer price competitiveness to the market is going to be key.”

In-kind subscription, redemption

The key distinguishing features of the forthcoming spot crypto ETFs are the in-kind subscription and redemption options they offer.

For example, the upcoming spot bitcoin and ether ETFs managed by Bosera Asset Management and HashKey Captial are expected to allow investors to subscribe for ETF shares using bitcoin and ether directly, according to the firms. 

“The fund can accept in-kind subscriptions,” Tiu of OSL said. “What it means is if you have an investor who has long BTC. But they don't want to exit the BTC position. But they want to swap it for another type of instrument — for example, for an ETF instrument or for an interest in the fund that tracks the performance of BTC — this now gives them the channel to do so.”

Tiu added that the feature is significant as it hasn’t been done in other markets, “certainly not in the retail fund space.”

“The work required to support this process for the [crypto] ETF products is actually quite substantial,” he continued.