Positioning for growth in Hong Kong’s evolving digital assets markets
Bloomberg Professional Services
Hong Kong has evolved rapidly into a global beacon for the issuance and trade of digital assets, with investors attracted to the city’s growing liquidity and to incentives and guardrails provided by a proactive regulator.
Innovation within the space has seen not only crypto spot and futures ETFs flourish, but also the issuance of the world’s first blockchain-based, multi-currency green bond. The market is now anticipating more, with the establishment of a stablecoin sandbox earlier this year, and likely to lead to the launch of more digital products.
The demand for new investment opportunities, including ETFs, has been strong for both institutions and retail investors, including family offices, who are relatively new to the asset class, experts at a recent Bloomberg conference said.
Global demand goes local
A conference speaker shared that digital assets are a fast-growth market, with more than $100 billion invested in at least 245 crypto ETFs worldwide. Hong Kong has responded enthusiastically to capitalizing on this growing market. The Securities and Futures Commission (SFC) has approved five bitcoin and ether spot and futures-based ETFs in the city, launched by China AMC, Bosera, Harvest, CSOP, and Samsung.
A poll showed that an overwhelming majority of participants at the Bloomberg conference already invest in digital markets, focusing mainly on tokenized assets. To meet this demand, authorities in the city are considering applications to open virtual exchanges over the coming year.
More digital investment products are in the pipeline too, stablecoins among them. These are digital assets tied to fiat currencies that are seen as essential to anchoring the asset class to regular markets. Several stablecoins are being considered for inclusion in a sandbox program devised by the Hong Kong Monetary Authority (HKMA).
Additionally, a robust cross-border market infrastructure that provides a bridge to the huge market in mainland China is expected to bring firepower to new markets. So-called dim sum bonds, for instance, facilitate investment in both directions across the frontier – including by global firms based south of the border – and can be crafted to embrace digital assets.
The characteristics of the Hong Kong market that make it attractive to other asset investors also apply to digital assets. Its low-tax fiscal regime operates within a business-friendly environment backed by a strong legal system.
Strong regulatory backing to foster growth
A regulatory framework engineered by the SFC and HKMA to provide a supportive environment for investors is enabling Hong Kong’s rise as a digital power. The rapid approval of crypto ETFs, the licensing of trading platforms, and the stablecoin sandbox have boosted confidence in Hong Kong’s potential to be a regional hub.
However, it must also persist against some shortcomings.
Hong Kong’s small population also limits the scope for growth, especially when compared with more populous regional competitors such as Australia and Thailand. It’s also expensive to create an ETF in the city; at $150,000, the entry fee is 30 times larger than the $5,000 it costs to list in the US.
Despite authorities’ enthusiasm to promote the digital sector, the broader regulatory picture is unsettled; in the poll during the Bloomberg conference, the complexity and rapid evolution of regulations in digital markets were overwhelmingly cited as the biggest impediment to tapping digital opportunities.
The experts agreed that by lowering the entry costs regulators would incentivize companies to launch more ETFs, stimulating investment and boosting liquidity. Another approach that would help improve prospects is the broader tokenization of real-world assets, a corner of global capital markets that some expect to be valued between $10 trillion and $16 trillion by the decade’s end.
Tokenization: A democratizing force in investing
The same drivers of demand for digital assets – principally institutions and family offices – would likely clamor for more tokenized products. The cost of trading them is lower and execution is instantaneous – an important consideration amid the operational expense being incurred to meet T+1 post-trade settlement rules.
Tokenization is also regarded as a democratizing force in investing that could account for half of all developed-market financial growth in the next few years.
Hong Kong has the infrastructure in place to accommodate an expansion of its tokenized offerings, and it is at no greater disadvantage than its competitors in terms of the challenges that tokenization presents. Ensuring trusted and secure data, and formulating roadmaps to advance from product proof-of-concept stages are difficulties faced by product manufacturers worldwide.
Technology is crucial to seize new opportunities
With Hong Kong’s prospect of strengthening its position at the digital asset vanguard, market participants will look to update their data and technology stacks to take advantage of the coming opportunities. That’s likely to be the case for wealth managers and family offices especially, which are less likely to have the expertise or tools to operate optimally within the digital space.
Technology will also be crucial in meeting the fast-changing regulatory obligations as well as to enable firms to tap new opportunities associated with the market. When asked about the challenges in tapping new investment opportunities, a majority of the Bloomberg conference attendees indicated they found it hard to cope with the complex and evolving regulations, manage risk, integrate standardized workflows and source technologies.
Automate your trading lifecycle with advanced tools
To capitalize on the opportunities offered by Hong Kong’s growth as a digital assets hub, organizations will seek to invest in technology and data services that can be tailored to the specific needs of the evolving market.
Bloomberg offers a comprehensive ETF suite of multi-asset tools that can be harnessed to manage trades in Hong Kong’s digital asset funds. Among them, the RFQe request for quotes functionality is the most efficient way to trade crypto ETFs, offering intraday liquidity and other features that institutions expect from their fund management tools. The solution allows firms to connect to the Canton Network, the blockchain-based trading nexus built specifically for the financial industry.
Bloomberg’s integrated solution offers advanced pricing, portfolio and risk management, analytics, pre- and post-trade processing, and execution functionalities, enabling firms to automate the trading workflow and improve operational efficiency.