- Banks in Hong Kong are hesitant to list virtual spot ETFs due to AML and KYC regulatory concerns.
- Institutional investors are expected to increase their allocation to virtual assets within the next 2-3 years.
The virtual spot ETF was launched in Hong Kong on June 11, 2024, but no banks have started to distribute it yet more than a month later.
This reluctance is mostly due to worries about regulatory risks related to anti-money laundering (AML) and know-your-customer (KYC) as well as a shortage of pertinent technical expertise in traditional banks.
An Ernst & Young Hong Kong staff member said that currently there are mainstream brokerage firms involved in the distribution of HK cryptocurrency spot ETFs, but no bank has listed them yet. They may need to wait for the approval of the regulatory body or internal evaluation.…
— Wu Blockchain (@WuBlockchain) June 12, 2024
Head of financial services consultancy data and analysis at Ernst & Young Hong Kong Chris Barford underlined that traditional financial institutions are more interested in the underlying technologies than in most virtual currencies.
Banks stay out of the picture even if major brokerages are involved in distributing these virtual asset spot ETFs.
Securities companies and banks are regulated by different agencies, hence before participating, banks must obtain express approval from their regulatory bodies and carry out extensive internal assessments.
Barford emphasized the need of these institutions meeting strict regulatory requirements, particularly with regard to KYC and AML requirements. The Hong Kong government has established a solid regulatory framework; the next phase is to concentrate on the technological elements to bring about compliance.
The worldwide talent shortfall is a big issue in this industry. It is imperative to grasp virtual assets and distributed ledgers and to combine this understanding with financial services and regulatory frameworks.
Barford pointed out that these products can not become more widely accepted unless they meet the risk control requirements of traditional banks.
Customer Demand and Trading VolumeÂ
Financial institutions are mostly driven by customer demand, yet virtual asset ETF trading volume in Hong Kong is still little.
From its launch on April 30 to June 7, for instance, the China Bitcoin ETF had an average trading volume of 1,557,000 yuan, significantly lower than the trading volumes observed in the US.
Though investors may be hesitant to move their capital right away, Barford thinks Hong Kong’s steady regulatory path makes it an appealing market.
Meanwhile, the end of May saw the withdrawal of licensing applications by 11 firms citing limitations on consumers in mainland China, according to ETHNews. The regulatory setting in the area complicates virtual asset investments even further.
Institutional Investors and Technological Applications
Virtual assets are likewise drawing more and more interest from institutional investors. According to an Ernst & Young poll, a lot of institutional investors intend to boost their virtual asset allocations throughout the next two to three year.
Most will invest about 1% of assets under management, which exceed US$500 billion; several family offices have already done so. As Barford noted, virtual assets are quite volatile even if they can yield large gains. A more appealing use of these assets depends on efficient risk management.
Virtual asset technology applications in custody, payment, and settlement particularly attract traditional financial organizations.
Tokenization is becoming more popular, for instance; in Hong Kong, HSBC introduced tokenized gold for individual investors. Barford proposed that tokenization might also apply to real estate investments, creating fresh revenue streams even in pricey cities like Hong Kong.