Hong Kong may face fresh challenges as its lead in offering exchange-traded funds (ETF) that invest directly in ether, the world's second largest cryptocurrency token, may soon disappear with the imminent launch of similar products in the much larger US market, but the city could remain attractive to a specific set of investors it tries to become a virtual asset hub.

The US Securities and Exchange Commission (SEC) has given "preliminary approval" to some asset managers to launch their own spot ether ETFs, Reuters reported on Tuesday, citing anonymous sources. The regulator previously permitted stock exchanges to list ether products in May, following the landmark launch of a range of spot bitcoin ETFs on US exchanges in January.

Hong Kong was the first major financial market to approve spot ether ETFs, which launched on the city's stock exchange along with spot bitcoin ETFs in April. By including ether in its crypto ETF approvals, Hong Kong was seen as having a unique advantage over the US, if only briefly.

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Since late 2022, Hong Kong has been making a major push to attract crypto-related business to the city by offering regulatory clarity in difference segments of the industry. Spot crypto ETFs are one of the latest moves, along with proposed stablecoin regulations that on Wednesday concluded public consultation. The Hong Kong Monetary Authority (HKMA) said there was broad consensus for its proposals that include licensing for issuers of crypto tokens tied to fiat currency.

Physical representations of bitcoin and ether tokens are presented during the listing ceremony of the spot cryptocurrency ETFs issued by China Asset Management at the Hong Kong stock exchange on April 30, 2024. Photo: Bloomberg alt=Physical representations of bitcoin and ether tokens are presented during the listing ceremony of the spot cryptocurrency ETFs issued by China Asset Management at the Hong Kong stock exchange on April 30, 2024. Photo: Bloomberg>

With ETFs, similar product offerings in the US may overshadow those in Hong Kong given New York's much larger trading volumes. However, experts said Hong Kong could still benefit from the upcoming launch.

US spot ether ETFs could increase investor awareness in Hong Kong of Ethereum, the blockchain for ether, according to Deng Chao, CEO of HashKey Capital, a local cryptocurrency firm that worked with Chinese fund house Bosera Asset Management to launch bitcoin and ether ETFs in the city.

In May, Hong Kong's spot ether ETFs saw inflows jump in anticipation of US approval of such products.

Despite being hailed as a major step in the city's pursuit to become a virtual asset hub, Hong Kong's spot crypto ETFs have mostly seen meagre turnover compared with bitcoin ETFs in the US.

But the Hong Kong ETFs can still draw in a more narrow set of investors, even with competition from larger players in the US, according to some.

"The Hong Kong market is likely attractive to a specific set of investors, including those who cannot or do not want to access the US market for various reasons," said Angela Ang, senior policy adviser at blockchain analytics firm TRM Labs.

Investors based in Asia who want to avoid the hurdle of opening a US brokerage account and paying the country's capital gains tax would prefer products listed in Hong Kong, analysts previously told the Post.

The city is now slowly pushing ahead with regulations for the sector, as the Securities and Futures Commission carries out on-site inspections of the crypto exchanges that are deemed to be licensed - a requirement to continue operating in the city as of June - and as the HKMA finalises its stablecoin regulations.

Several other factors - including interest from investors, the outcomes of the crypto exchange inspections, and the regulation trajectory - are "arguably more important than the launch of crypto ETFs in the US", Ang said.

US actions will not "set back Hong Kong at all" if the city's regulators keep sending positive signals and maintain a "welcoming atmosphere for businesses" in the digital asset sector, said Dan Tapiero, founder and CEO of US venture capital firm 10T Holdings.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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