Will Bitcoin and Ethereum ETFs open trading to mainland China?
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Will Bitcoin and Ethereum ETFs open trading to mainland China?
Mainland securities firms providing retail investors with access to purchase BTC and ETH ETFs would clearly violate the Notice on ICO-related Risks (Circular 94) and the Notice on Further Preventing and Disposing of Virtual Currency Trading Speculation Risks (Circular 924).
Navigating Web3 tides with focused insightsAuthor: Jin Jianzhi
On May 9–10, the Bitcoin Asia summit was held in Hong Kong, drawing major industry players and sparking lively discussions. Han Tongli, CEO of Harbin Fund Management, spoke about the possibility of including BTC and ETH ETFs into the ETF Connect program. ETF Connect is part of the broader “Stock Connect” initiative launched in 2014, designed to link Hong Kong’s exchanges with those on mainland China.
This sounds incredibly exciting. If realized, it would indeed mean that mainland residents could purchase BTC and ETH ETFs. Han Tongli further stated, “As long as everything goes smoothly over the next two years, we do not rule out applying to include our ETFs in the互联互通 (Connect) program.”
Mainland Chinese investors are surely wondering: why can’t this plan be implemented immediately? Why does it require another two years? The path outlined by Mr. Han still faces several unresolved obstacles. Here are the main ones.
What Is Stock Connect?
Stock Connect refers to a trading and settlement mechanism established between securities markets in different countries or regions, enabling investors to directly invest in stocks or other securities of the counterpart market through their local exchange.
The Stock Connect program between mainland China and Hong Kong primarily consists of two components: Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect:
1. Shanghai-Hong Kong Stock Connect: Launched on November 17, 2014, it allows investors from the Shanghai Stock Exchange (SSE) and Hong Kong Stock Exchange (HKEX) to trade each other's listed stocks via their respective trading and settlement systems.
2. Shenzhen-Hong Kong Stock Connect: Launched on December 5, 2016, it expanded the scope of connectivity to include the Shenzhen Stock Exchange (SZSE), further broadening the range of tradable stocks for investors.
On July 4, 2022, ETF Connect officially launched, allowing qualified mainland and Hong Kong investors to cross-invest in ETF products offered in each other’s markets. The depository receipt business under Stock Connect also forms part of this mechanism, enabling overseas companies to issue Chinese Depository Receipts (CDRs) or Global Depository Receipts (GDRs) and list on the counterpart market, thus achieving cross-border financing and investment.
In short, the Stock Connect program is a key step toward opening up mainland China’s capital market. That said, the opening-up process has always proceeded cautiously—“crossing the river by feeling the stones”—so it follows that the eligible securities available under Stock Connect are subject to strict conditions. For example, stocks must typically be constituent stocks of major indices in both markets and meet certain thresholds regarding market capitalization and liquidity.
Specifically for ETFs, there are no few requirements for a Hong Kong-listed ETF to qualify as an investable product under Connect. See the figure below. Currently, Hong Kong’s BTC and ETH ETFs fail to meet these requirements in terms of asset management scale, listing duration, and index composition.
Source: HKEX, "Exchange Traded Funds Eligible for Inclusion in the Mutual Market - Guidance Note for Issuers" (updated May 27, 2022)
We always take a developmental view. Listing time and asset scale will eventually cease to be issues. However, the hurdle related to index composition remains significant. Currently, the underlying securities of ETFs included in Connect must primarily consist of Hong Kong stocks. But BTC and ETH ETFs fall under virtual asset ETFs and therefore do not satisfy the requirement that underlying securities be mainly comprised of Stock Connect-eligible shares. Overcoming this compositional barrier would require specific regulatory approvals and new rulemaking for such products—efforts that will rely heavily on leading brokers like Harbin Fund. Given Hong Kong’s current momentum in Web3, regulatory progress on the Hong Kong side appears unlikely to face major hurdles; the pressure now lies with the mainland.
Are Mainland Regulations Permissive?
For mainland retail investors, buying and selling cryptocurrencies has never been explicitly prohibited. Investors who meet the eligibility criteria for Stock Connect—specifically, whose combined securities and cash account assets total no less than RMB 500,000—could find purchasing BTC and ETH ETFs through Connect a convenient investment option.
However, implementing a plan to open Bitcoin and Ethereum ETF trading to mainland investors would place substantial pressure on mainland financial institutions, particularly brokerages. The “Announcement by the People’s Bank of China and Six Other Departments on Preventing Risks of Token Issuance Financing” (the “94 Announcement”) and the “Notice on Further Preventing and Managing Risks of Cryptocurrency Trading and Speculation” (the “924 Notice”) clearly state that financial institutions must not provide services related to cryptocurrency activities. Specifically, they may not open accounts, conduct fund transfers or settlements, include cryptocurrencies as collateral, offer cryptocurrency-related insurance, or cover cryptocurrencies under insurance policies.
In other words, if mainland brokers were to offer mainland retail investors access to buy BTC and ETH ETFs, they would be clearly violating the 94 Announcement and the 924 Notice.
Summary
Both the 94 Announcement and the 924 Notice are policy directives—the former issued in 2017, the latter in 2021—so some time has passed. Policy is inherently changeable, much like housing purchase restrictions. It’s hard to predict how regulations might evolve in the future, but throughout history, we often observe unstoppable trends. There is inevitably a large gap between such trends and the current reality. No one knows exactly how or when these gaps will gradually close—but many people are working toward that end.
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