Lackluster debut for crypto ETFs in Hong Kong

Kbank’s Upbit Customer Deposits Total $2.2BKbank, an internet-only bank in South Korea, is facing criticism due to its relatively high proportion of cryptocurrency customer deposits compared to other banks. Kbank reportedly manages approximately KRW 3 trillion (equivalent to $2.2 billion) in deposits from customers of cryptocurrency exchange Upbit, which accounts for about 18% of its total customer deposits.This percentage stands out, being notably higher than other banks that provide accounts to the other four crypto-to-fiat exchanges in Korea. That is according to a report by Maeil Business Newspaper, which obtained documents submitted to lawmaker Kim Hee-gon by the Financial Services Commission (FSC).According to Korean law, crypto exchanges must secure real-name bank accounts from banks to offer crypto trading services against the Korean won. Kbank offers its accounts to Upbit, the dominant player in the Korean crypto market.Photo by David McBee on PexelsNotable exposure to crypto exchangeThe FSC documents showed that Kbank’s Upbit customer deposits totaled KRW 3.09 trillion, making up 18% of its total deposits, which amount to KRW 17.2 trillion.In a striking contrast, Nonghyup Bank had 0.2% of its deposits, equivalent to KRW 557.8 billion, in Bithumb, which is the nation’s second-largest cryptocurrency exchange. Kakaobank, another internet-only bank, had 0.3% (KRW 112.2 billion) of its deposits in Coinone. Shinhan Bank held 0.01% (KRW 43 billion) in Korbit, and Jeonbuk Bank had a similarly small 0.02% (KRW 4.2 billion) in Gopax.Lawmaker Kim pointed out that Kbank has become a bank dedicated to crypto trading. Kim proposed that financial authorities take proactive measures to assess the potential risks that may emerge when Kbank utilizes Upbit customer deposits as a basis for offering credit loans. Such risky financial practices could potentially result in higher loan defaults and the emergence of a greater number of individuals with poor credit histories, which could ultimately jeopardize the stability of the financial market.Regulatory gapThe current Financial Transaction Reporting Act mandates that virtual asset service providers (VASPs) segregate customer deposits from their own assets as a measure to combat money laundering. However, it has been noted that there are regulatory gaps stemming from the absence of specific guidelines for the custody of these deposits.According to the Financial Supervisory Service (FSS), Nonghyup and Kakaobank store deposits in separate accounts within the bank. On the other hand, Kbank and Jeonbuk Bank keep deposits in corporate accounts under their respective exchange partners’ names.When deposits are stored in separate accounts within the bank, only the bank has access to those funds, and they are essentially operated in a manner similar to a trust, preventing the bank from using the funds arbitrarily. In contrast, funds held in corporate accounts can be used by the bank as a source for lending. Lawmaker Kim warned that in scenarios such as exchange bankruptcies or similar situations, banks holding customer funds in corporate accounts could face difficulties in ensuring customer protection.Each of these banks receives reserve funds from crypto exchanges in anticipation of potential compensation requirements in the event of unforeseen losses. The FSS states that as of the end of last month, the reserve amounts held by each bank were as follows: Kbank had KRW 200 billion, Nonghyup Bank had KRW 100 billion, Kakao Bank had KRW 73 billion, and both Shinhan Bank and Jeonbuk Bank had KRW 30 billion.Kbank’s Upbit customer deposits are approximately 72 times larger than Shinhan Bank’s Korbit customer deposits. However, the reserve amounts held by Kbank are only 6.7 times greater than those held by Shinhan. Lawmaker Kim emphasized the importance of banks maintaining reserve funds that are proportional to the customer deposits held in their partner crypto exchanges.Signs of recoveryMeanwhile, the Korean cryptocurrency industry, which faced a downturn in the latter half of last year due to events like the Terra collapse and FTX’s bankruptcy, has exhibited signs of recovery in the first half of this year.The Financial Intelligence Unit (FIU) of the FSC recently reported that the cryptocurrency market cap in South Korea has reached KRW 28.4 trillion as of the end of June this year. This reflects a 46% increase compared to the end of last year when it stood at KRW 19.4 trillion. Additionally, the total operating profit of domestic exchanges surged by 82% to KRW 227.3 billion over the past six months, compared to the previous figure of KRW 124.9 billion.The total market’s max drawdown (MDD) was 62%. MDD assesses the extent to which an asset has declined in value from its highest point to its lowest point within a specific time frame, before experiencing a recovery. The FIU considers this MDD to be high, urging investor caution.

At the Foresight 2024 Hong Kong Summit on Aug. 11, Gary Tiu, director and head of regulatory affairs for OSL, a crypto market custodian, exchange and prime brokerage, outlined in a panel discussion that the crypto exchange-traded fund (ETF) market in the Chinese autonomous territory is challenged insofar as it lacks market incentives.Photo by Cecelia Chang on UnsplashThe intermediary problemTiu’s company hosted the event, alongside Foresight News and crypto publication The Block, who reported on Tiu’s comments. The OSL executive said that when it comes to funds and structured products in Hong Kong, there’s a “very rich layer of intermediaries— brokers, banks, private banks, retail banks, etc.” involved. Tiu explained that they make a lot of money from the distribution of such products, resulting in unlisted products being marketed far more effectively by comparison with listed products. It’s against that backdrop of misaligned incentives that Tiu identifies challenges for crypto ETFs on the public markets in Hong Kong. He stated: “So I think the incentive system in Hong Kong is one of the reasons why ETFs do have a bit of a hard time growing as a financial instrument.” In the case of ETFs, the OSL executive explained that equity brokers take just a few basis points in commission, only about 1-2% of what they make on the sale of structured products. Bias against Bitcoin and EtherTiu is also of the belief that cryptocurrencies like Bitcoin and Ether have a reputational problem among Hong Kong’s investment community, stating: “I think there is still a bit of a bias in the eyes of the regulators and also in the eyes of the financial institutions, that somehow bitcoin ETF is just this unique class of risk that you need to be extra cautious about.” Chen Zhao, who heads up the digital assets section of Hong Kong-based independent financial advisory firm Fosun Wealth, chimed in with his own concerns. According to Zhao, the crypto ETF products currently marketed in Hong Kong are lacking in terms of the depth of dealers and brokers offering the products. Zhao explained that there are three main types of market participant active on the Hong Kong markets, namely western institutions, Hong Kong-based institutions and their counterparts from mainland China.  Zhao stated: “Chinese brokers and dealers, they’re not allowed or they choose not to deal with the product, and for the western financial institutions, they don’t have the necessity of dealing the products because they acquire more fees and incentives, and have easier access to the U.S. ETFs.” While progress is far more modest by comparison with the U.S. market, the Hong Kong crypto ETF market continues to develop, with spot Bitcoin and Ethereum ETFs setting a record trading volume last week. In the same week, Mox Bank, a subsidiary of British banking multinational Standard Chartered, launched trading services relative to spot Bitcoin and Ethereum ETF products in Hong Kong. Last month, OSL CEO Patrick Pan, anticipated that an Ethereum ETF product that incorporated staking would launch in Hong Kong within six months. Many commentators have suggested that institutional interest in Ethereum ETFs will begin in earnest once a yield-producing staking product hits the market.

Metaverse gaming company Animoca Brands has recently announced a strategic partnership with Saakuru Labs, aiming to drive the adoption and integration of blockchain technology within Saakuru Labs' ecosystem. The collaboration is expected to bolster the expansion of the Web3 gaming industry, particularly in Southeast Asia, where the partnership officially kicks off. The initiative involves the incorporation of Web3 games developed with the Saakuru Protocol into the Animoca Brands ecosystem. Gasless transactionsAnimoca Brands will play a crucial role by providing gaming titles to its partners, while Saakuru Labs will facilitate Animoca Brands' expansion efforts in Southeast Asia. Developers stand to benefit from access to accelerated development processes and gasless transactions. Gasless transactions are particularly significant in regions like Southeast Asia, known for lower-income demographics. The market has shown a keen interest in blockchain technology and Web3 games, indicating promising growth potential. With gasless transactions, developers can seamlessly integrate critical functionalities into their gaming titles, including infrastructure components.Photo by Bastian Riccardi on UnsplashTransition to Web3 gamingThe Saakuru Protocol, known for its consumer-centric L2 infrastructure, enables major integrations of Web3 components into traditional gaming segments. This ensures a smooth transition from traditional gaming to Web3 gaming, enhancing the overall gaming experience. Yat Siu, Executive Chairman of Animoca Brands, emphasized the pivotal role of gaming in the evolution of the Internet and open metaverse, highlighting Southeast Asia's potential to lead in Web3 technology adoption. Jack Vinijtrongjit, CEO of Saakuru Labs, underscored the platform's capability to offer seamless engagement with multiplayer gaming titles without latency or transaction fees. The partnership between Saakuru Labs and Animoca Brands aligns with Saakuru Labs' recent collaboration with cloud computing infrastructure platform Aethir, aimed at enhancing blockchain gaming through GPU infrastructure. Notable partners of Animoca Brands, including GameGPT, W3GG and GameFi.org, have already expressed their commitment to adopting the gasless protocol. Experts believe that gaming presents an ideal avenue to accelerate blockchain technology adoption and advance Web3 gaming principles. With gaming becoming a mainstream form of entertainment, seamless integration of technology is crucial for user acceptance. The outcome of the Animoca Brands and Saakuru Labs partnership is anticipated to manifest results in the coming quarter or by the end of the year.