Hong Kong regulator prepares to approve cash-in-kind Bitcoin ETFs

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

Hong Kong publishes Bitcoin Spot ETF rules

The Hong Kong Securities and Futures Commission (SFC) published a circular on December 22 for “permitted 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 (VA) greater 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 there is now a broader range and greater number of investment products providing crypto exposure, including crypto exchange-traded funds (ETFs), available for retail and professional investors. . After 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 certain VA products to be offered to the Hong Kong public with appropriate investor protection safeguards.

The SFC explained that it began accepting applications for ETFs with exposure to crypto assets primarily through futures contracts in October last year. “The SFC’s Virtual Asset Trading Platforms (VATP) licensing regime also came into effect in June 2023, allowing Hong Kong investors to directly access large-cap spot VAs, subject to certain eligibility requirements and strong investor protection safeguards,” the regulator added.

Spot cryptocurrency transactions and purchases by SFC-licensed funds must be conducted through SFC-licensed cryptocurrency trading platforms or authorized financial institutions, in compliance with the regulatory requirements of the Hong Kong Monetary Authority (HKMA). ), the SFC emphasized. The regulator emphasized:

   Subscription and redemption in kind and cash are permitted for spot VA ETFs authorized by the SFC.

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