Reactions of Key Asian Countries on Bitcoin ETF Approval
Focus on Korea, China, Japan, Singapore, and Hong Kong
TL;DR
The approval of a spot Bitcoin ETF by the US Securities and Exchange Commission (SEC) is a major milestone in making the cryptocurrency market more accessible to institutional investors.
Regulators in major Asian countries have taken varied approaches to Bitcoin ETFs, with South Korea's regulator stating its intention to restrict trading and Japan exploring the possibility through private associations. Singapore and Hong Kong have taken a relatively open approach.
The approval of a spot Bitcoin ETF could lead to changes in global regulation, a shift in roles between traditional financial institutions and cryptocurrency exchanges, and the development of a market for new crypto investment products.
Bitcoin ETF Approval and Institutional Entry
The US Securities and Exchange Commission (SEC) approved a bitcoin spot exchange-traded fund (ETF) on Tuesday. This is the first time Bitcoin has been incorporated into the US system, opening the way for institutional investors who have been hesitant to buy Bitcoin due to tax, accounting, and custody issues, and is expected to energize the market. British banking giant Standard Chartered (SC) stated in a report that "if a Bitcoin ETF is approved, it could bring in up to $100 billion (KRW 131 trillion) this year alone".
However, this change does not apply to all countries. Regulators in South Korea, commonly considered a "big player" in the crypto market, halted trading in a Bitcoin spot ETF last week, and legal entities are still restricted from investing in crypto. These restrictions are not unique to South Korea, as they are largely due to differences in the strength of "investor protection" and interpretation of crypto laws in different countries.
Key Asian countries’ reaction to SEC approval of Bitcoin ETFs
1. South Korea
South Korea is the only major Asian country to take a clear stance on the US Securities and Exchange Commission's (SEC) approval of a bitcoin exchange-traded fund (ETF). In response to the recent approval of Bitcoin spot ETFs in the United States, the South Korean Financial Services Commission has stated that it will not allow domestic investors to invest in overseas-listed Bitcoin spot ETFs, and has decided not to further consider launching a Bitcoin spot ETF in the country. The FSS based its decision on the "Emergency Measures on Virtual Currency" issued in December 2017, which prohibits financial institutions from holding, purchasing, pledging, or making equity investments in virtual currencies.
The Financial Services Commission based its decision on consideration of the differences in legal systems between the US and South Korea, as well as the stability of financial markets, the soundness of financial companies, and investor protection. However, major securities firms had already issued support announcements and supported trading, which added to the confusion after the announcement of the approval from the United States. In response, President Yoon has ordered a broader review of how the current policy affects the market. Nevertheless, given that Korea’s stance comes from the discrepancies between the current legal framework of the two countries, it is expected to take a considerable amount of time before South Korea approves a domestic Bitcoin ETF or authorizes trading of a US Bitcoin ETF.
2. China
China's attitude toward crypto is firm. Not much has changed since the country banned the trading of digital assets in September 2021, citing concerns about money laundering, currency outflows, and the environmental impact of bitcoin mining. The Chinese government has not officially commented on the SEC's approval, and this is unlikely to change anytime soon.
Furthermore, while it is possible to trade US stocks in China, the process is very complicated. There are numerous hoops to jump through to trade US stocks, including opening a forex account, converting currency to meet regulatory standards, and depositing funds. Furthermore, there is no way to buy US Bitcoin futures ETFs in China, making it unlikely that you can trade US-listed spot Bitcoin ETFs in China.
3. Japan
In Japan, there is no discussion of supporting a domestic Bitcoin ETF. It is also currently not possible to trade Bitcoin ETFs listed in the United States. However, the private sector in Japan is making efforts to explore the possibility of trading Bitcoin ETFs.
In particular, the movement is centered around the Japan Cryptocurrency Business Association (JCBA), which has been compiling the legal and regulatory requirements to introduce a Bitcoin ETF, recognizing the different regulatory environments in the US and Japan. In addition to the association, large financial institutions such as the SBI Group are also actively involved in the process, helping to shape the private sector-driven movement.
4. Singapore
With a number of Bitcoin-based funds having already been launched in the past, it is now possible to trade US-listed Bitcoin ETFs in Singapore. In addition, Singapore's financial authority, MAS, is expected to further refine cryptocurrency legislation through the ‘Financial Institutions (Miscellaneous Amendments) Bill 2024’, which will open up more areas for business.
5. Hong Kong
Even before the SEC's approval of the Bitcoin ETF, Hong Kong's Securities and Futures Commission (SFC) and Hong Kong Monetary Authority (HKMA) said the virtual asset landscape was changing significantly, with SFC CEO Julia Leung announcing that Hong Kong’s regulatory bodies were ready to consider an application for a spot crypto ETF. After the approval, Hong Kong lawmaker Johnny Ng urged the government to follow suit, citing the US approval of spot Bitcoin ETF as an example.
Limitations from restricting ETF trading
Limitations on access to markets
Lack of investor protection
Capital outflow risk
1. Limitations on access to markets
Countries that restrict Bitcoin ETFs face several limitations. First, it can limit access to the cryptocurrency market. This can be seen in the past with gold ETFs. Before they were introduced, individual and institutional investors had to purchase physical gold or invest in complex derivatives to invest in gold. This complicated the investment process and increased costs, especially for retail investors with small amounts of capital. Similarly, in countries where Bitcoin ETFs are restricted, investors cannot enjoy eased accessibility and are forced to invest in more complex and costly ways.
2. Lack of investor protection
It can also paradoxically result in a lack of investor protection. ETFs are regulated financial instruments with investor protection mechanisms in place. The lack of investor protection in the absence of a Bitcoin ETF is similar to that of direct investments in commodity futures in the past. The highly speculative nature of the commodity futures market was complex and difficult for individuals to understand and manage, increasing the risk of large losses for the average investor.
The emergence of commodity futures ETFs has served to simplify access to these markets and increase investor protection. Similarly, the lack of a Bitcoin ETF leaves investors exposed to a highly volatile spot price, which can have negative consequences in terms of investor protection.
3. Capital outflow risk
Finally, there is the issue of capital outflows. An example of how restrictions on Bitcoin ETFs can lead to capital outflows can be seen in China's stringent stock market regulations. In 2015-17, the Chinese government introduced a number of regulations on the stock market, which led to capital outflows from the country as many investors sought out foreign stock markets or other investment vehicles.
Similarly, if Bitcoin ETFs are restricted, investors are likely to seek out Bitcoin ETFs in other countries or other means of investing in cryptocurrencies. This could lead to capital outflows from those countries and negatively impact the stability of their domestic financial markets.
Three changes to expect in the future
Global regulatory changes
Role division in exchanges
Evolution of products
1. Global regulatory changes
The SEC's decision to authorize Bitcoin ETFs will have a significant impact on the regulatory direction of many countries. This is especially true because the SEC is a key member of the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board (FSB), which play an important role in shaping global financial regulatory standards. Many regulators rely on the SEC's rulings. For example, the SEC was instrumental in the convergence of US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), which have become widely accepted as accounting standards around the world.
Against this backdrop, the SEC's approval of Bitcoin ETFs could spur financial regulators in other countries to reconsider their regulatory policies for crypto. Notably, Bitcoin ETFs have already been authorized in Canada, Australia, and a number of countries in Europe, and the SEC's decision could accelerate this trend. More specifically, the initial approval from the SEC will lead to more precise criteria for ETF approval concerning investor protection which can streamline future approval procedures.
2. Role division in exchanges
With the approval of ETFs, we believe that there will be a division of roles depending on investment purposes, with 1) traditional financial institutions looking for stable investments in regulated cryptocurrencies, and 2) crypto exchanges looking to invest aggressively in various asset classes and generate secondary returns. In particular, this trend is likely to be accelerated by the decline in fees for Bitcoin ETFs, which are currently around 0.4% and could be competitively lowered to around 0.05%, the average for other ETFs.
This reduction in fees for Bitcoin ETFs would bring them in line with those of major virtual exchanges. This would create a disincentive for investors who invest in physical assets but do not leverage them for secondary returns to invest in crypto exchanges, at least for assets that are financialized within the traditional financial system, such as Bitcoin.
Furthermore, crypto exchanges generally have more hoops to jump through to access than traditional financial institutions, although this varies by exchange. This, coupled with the wariness concerning the instability of crypto exchanges following the bankruptcy of the FTX exchange will make stable traditional financial institutions that handle authorized financial products, such as ETFs, even more attractive than crypto exchanges.
Nevertheless, traditional financial institutions will only be able to trade a limited number of approved cryptocurrencies, which will not be able to fully satisfy existing crypto investors. These investors will still turn to crypto exchanges that offer a wide range of crypto trading. To thrive within a more specified role, crypto exchanges will need to devise a variety of secondary investment products, such as staking, that cannot be devised by traditional financial institutions.
3. Evolution of products
The evolution of new products in the crypto market will follow a similar path to the development of derivatives in traditional financial markets. These products will raise the maturity of the market and provide investors with a variety of investment strategies. Initially, we will see the launch of basic spot-based Bitcoin ETFs. This is similar to equity-based ETFs in traditional financial markets, which allow you to invest in the value movements of a stock or commodity without directly owning it. Later, more complex derivatives are likely to emerge, such as leveraged and inverse ETFs, and ETFs that offer dividend yields. These products will provide investors with diversification in their investment strategies and a means to react to more complex market conditions.
However, as evidenced by Gary Gensler's letter approving the Bitcoin ETF, the regulator's approval was not based on positive intentions, but rather on the applicants’ satisfaction of conditions based on U.S. court rulings, such as the Grayscale case. As such, the subsequent evolution of derivatives is still a long way off. New product launches will likely follow the path of derivatives in traditional financial markets while reflecting their unique characteristics and regulatory environment over time.
Change, a matter of time
There is no denying that the approval of a spot Bitcoin ETF in the US will have a significant impact on the Asian market. As we've written in numerous previous articles, we believe this change could be particularly impactful in Asia because 1) the region already has a high rate of cryptocurrency adoption and 2) a large number of active investors. In particular, the approval of spot ETFs is expected to even attract institutions, as it will provide a more stable and regulated investment vehicle beyond already existing forms of cryptocurrency investments.
However, despite this positive outlook, countries in Asia have different regulatory environments and economic conditions. Therefore, it will be important to find a balance between each country's regulations and realities in the introduction and management of spot ETFs, rather than flatly blaming the current restrictions of each country's regulatory authorities.
Given the diversity and unique characteristics of Asian markets, it will be essential for each country to develop the optimal regulatory framework for its own market environment, rather than blindly following the SEC's decisions and standards. With this approach, the Asian market will hopefully establish its unique place in the global cryptocurrency market.
Participate in our 1-minute survey to help improve our weekly reports. As a thank you, you can download Tiger Research's original "2023 Country Crypto Matrix" spreadsheet, an all-in-one spreadsheet for the global virtual asset market analysis after finishing the survey.
Disclaimer
This report has been prepared based on materials believed to be reliable. However, we do not expressly or impliedly warrant the accuracy, completeness, and suitability of the information. We disclaim any liability for any losses arising from the use of this report or its contents. The conclusions and recommendations in this report are based on information available at the time of preparation and are subject to change without notice. All projects, estimates, forecasts, objectives, opinions, and views expressed in this report are subject to change without notice and may differ from or be contrary to the opinions of others or other organizations.
This document is for informational purposes only and should not be considered legal, business, investment, or tax advice. Any references to securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or an offer to provide investment advisory services. This material is not directed at investors or potential investors.