Author: Jin Jianzhi

From May 9th to May 10th, the Bitcoin Asia Summit (Bitcoin Asia) was held in Hong Kong, where giants gathered and spoke freely. Among them, Han Tongli, CEO of Harvest Fund, discussed the possibility of including BTC, ETH's ETF in the ETF Connect program, ETF which is part of a broader Stock Connect initiative launched in 2014 to connect Hong Kong with exchange in mainland China.

Sounds very exciting. If the plan can be realized, it does mean that mainland residents can buy BTC and ETH ETFs. Han further said, "As long as everything goes well in the next two years, we do not rule out applying to include our ETFs in the Stock Connect programme."

Excited mainlanders must have this question, why can't this plan be realized immediately and it will take two more years? Because the path that Mr. Han said has been realized, there are still some obstacles that have not been broken. Specifically, the main obstacles are as follows.

What is Stock Connect?

Stock Connect refers to a trading and settlement mechanism established between the securities markets of different countries and regions, allowing investors to directly invest in stocks or other securities products in each other's markets through the local market.

The Stock Connect Scheme between Mainland China and Hong Kong mainly consists of two parts: Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect:

1. Shanghai-Hong Kong Stock Connect: Launched on 17 November 2014, it allows investors in the Shanghai Securities exchange (SSE) and the Hong Kong exchange (HKEx) to buy and sell stocks in each other's markets through their respective trading and Settlement systems.

2. Shenzhen-Hong Kong Stock Connect: Launched on 5 December 2016, the scope of Stock Connect has been expanded to include the Shenzhen Securities exchange (SZSE), further expanding the types of stocks that investors can trade.

On 4 July 2022, ETF Connect was officially launched, allowing eligible Mainland and Hong Kong investors to invest cross-border in ETF products in each other's markets. The Stock Connect Depositary Receipts business is also part of the Stock Connect mechanism, which allows foreign companies to list on the other market's market through the issuance of depositary receipts (CDRs or GDRs) to achieve cross-border financing and investment.

In short, the Stock Connect is an important measure for the Capital Market opening up of the Mainland China, and having said that, the opening up of the Mainland Capital Market has always crossed the river by feeling the stones, so it is conceivable that the tradable targets under the Stock Connect have strict conditions. For example, stocks usually need to be constituent stocks of the main indices of the two places, and meet certain standards such as market capitalization and liquidity.

Specific to ETFs, there are many requirements that need to be met for ETFs of the Hong Kong Stock Exchange to become tradable investment targets, as shown in the figure below. However, Hong Kong BTC and ETH ETFs currently cannot meet the requirements in terms of Assets Under Management, listing time and index composition.

Photo source: Hong Kong exchange on "ETF Inclusion in Stock Connect - Notice to issuance Traders (Updated on 27 May 2022)"

We have always looked at the problem from the perspective of development, and there will be no problem with the time to market and the scale of management, but there will be a catastrophe in the index composition. At present, the constituent securities of the ETFs in the Internet need to be mainly Hong Kong stocks, but the ETFs of BTC and ETH are virtual asset ETFs, and they do not meet the above requirements that the constituent securities are mainly based on the underlying stocks of the Hong Kong Stock Connect. Breaking through the barriers of index ingredients requires specific regulatory approvals and rule-making for such products. And this depends on the efforts of excellent brokerages represented by Harvest Fund. Under the current Web3 east wind in Hong Kong, there is not much obstacle to the regulatory forecast on the Hong Kong side, so the pressure is on the mainland.

Is it allowed by regulatory policies in mainland China?

For mainland retail investors, buying and selling Virtual Money has never been Plaintext prohibited, and if the total amount of securities account and capital account assets coin is not less than RMB 500,000 to meet the conditions for opening the Stock Connect, it is also a worry-free investment method to buy BTC and ETH ETF through the Internet Connect.

However, in order to implement Bitcoin Ethereum ETF plan to open trading to the mainland, the pressure on the mainland's Financial Institution represented by securities firms will be greater. The Announcement of the People's Bank of China and Other Seven Departments on Preventing the Risk of Token Issuance and Financing (Announcement 94) and the Notice on Further Preventing and Handling the Risk of Speculation in Virtual Money Transactions (Notice 924) both make it clear that financial institutions shall not provide services for virtual money-related business activities. Financial Institution shall not provide services such as account opening, fund transfer and liquidation Settlement for Virtual Money-related business activities, shall not include Virtual Money in the scope of stake goods, shall not carry out insurance business related to Virtual Money or include Virtual Money in the scope of insurance liability.

In other words, mainland securities firms providing BTC and ETH ETF purchase services to mainland retail investors will clearly violate the 94 announcement and 924 notice.

Summary

The 94 Notice and the 924 Notice are both policy provisions, the 94 Notice was issued in 2017 and the 924 Notice was issued in 2021, which can be said to be some time ago. Policy regulations have always been longer and variable, just like the purchase restriction policy of houses. It is difficult to predict how policy will change in the future, but we will see some unstoppable trends in the course of historical development. There must be a big gap between the trend and the current situation, and no one knows in what form and at what point in time these gaps will slowly narrow, but there are always longest people working on it.