Hong Kong Regulator Prepares to Approve In-Kind Spot Bitcoin ETFs

Hong Kong’s financial regulator has published rules for spot bitcoin exchange-traded fund (ETF) issuers, allowing the use of both cash and in-kind creation models. This approach contrasts with the U.S. Securities and Exchange Commission (SEC), which insists on the exclusive use of the cash creation model for spot bitcoin ETFs.

Hong Kong Publishes Spot Bitcoin ETF Rules

The Hong Kong Securities and Futures Commission (SFC) published a circular on Dec. 22 for “authorized funds with exposure to virtual assets.” The regulator explained that the circular sets out the requirements under which the SFC would consider authorizing investment funds with exposure to virtual assets (VAs) of more than 10% of their net asset value (NAV) for public offerings in Hong Kong.

“Globally, the VA landscape has been evolving rapidly,” the SFC stated, noting that a broader range and a larger number of investment products providing crypto exposure, including crypto exchange-traded funds (ETFs), are now available to both retail and professional investors. Noting that they “have become increasingly popular,” the regulator detailed:

Demand for these products has also increased in Hong Kong. In light of these developments, the SFC has introduced regimes that allow the offering of certain VA products to the Hong Kong public with appropriate investor protection safeguards.

The SFC explained that it started accepting applications for ETFs with exposure to crypto assets primarily through futures contracts in October last year. “The SFC’s licensing regime of virtual asset trading platforms (VATPs) also became effective in June 2023, enabling Hong Kong investors to directly access large-cap spot VA, subject to certain eligibility requirements and robust investor protection safeguards,” the regulator added.

Spot crypto transactions and acquisitions by SFC-authorized funds must be carried out through SFC-licensed crypto trading platforms or authorized financial institutions, adhering to the regulatory requirements of the Hong Kong Monetary Authority (HKMA), the SFC emphasized. The regulator stressed:

Both in-kind and in-cash subscription and redemption are allowed for SFC-authorised spot VA ETFs.

Hong Kong is paving the way for spot bitcoin ETFs with both cash and in-kind models while the U.S. Securities and Exchange Commission (SEC) remains firm on the cash model. The U.S. regulator has reportedly given spot bitcoin ETF applicants until the end of the week to file amended registrations for inclusion in the first batch of decisions in early January.

What do you think about Hong Kong’s regulator preparing to approve spot bitcoin ETFs using both the cash and in-kind models? Let us know in the comments section below.

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