Hong Kong Nearing Approval for ‘In-Kind’ Bitcoin Spot ETFs

Hong Kong is on the brink of approving “in-kind” Bitcoin spot exchange-traded funds (ETFs), a development that carries significant implications for the cryptocurrency market. Unlike their Western counterparts, regulators in the region might allow these funds to employ an “in-kind” redemption model.

The term “in-kind” refers to ETFs that hold physical assets, such as Bitcoin, rather than tracking the asset’s price through derivatives or futures contracts. This distinction is crucial as it allows investors to directly own the underlying cryptocurrency, enhancing transparency and potentially reducing risks associated with synthetic products.

What do ‘In Kind’ Bitcoin ETFs entail?

The redemption model pertains to the mechanism through which a Bitcoin ETF’s shares correlate with the spot-traded BTC price. In this structure, all shares issued by the fund must be supported by sufficient BTC reserves, and market makers should have the capability to redeem these shares for an equivalent BTC value.

There are two primary methods to achieve this. The first is the ‘in-kind’ redemption model, where market makers can modify the supply of ETF shares in the market, return them to the ETF issuer, and receive BTC in exchange. Conversely, the ‘in-cash’ model involves a more extended process, with market makers receiving cash equivalent to the BTC value represented by their shares.

According to analyst Rebecca Sin, Hong Kong’s market could benefit significantly from the distinctive ‘in-kind’ characteristic.

“In the US, it involves cash input and Bitcoin ETF output, whereas in Hong Kong, the aim is to have Bitcoin input and Bitcoin ETF output,” she elaborated.

Prior to obtaining approval in January, sponsors of Bitcoin ETFs clashed with the Securities and Exchange Commission (SEC) over the allowance of in-kind redemptions for their ETFs.

Fund managers such as BlackRock contended that their in-kind model would offer lower transaction costs, reduced operating risk, and greater resilience to market manipulation compared to an in-cash model. Additionally, proponents argued that an in-kind model could mitigate tax complexities associated with converting BTC into cash.

However, the SEC remained steadfast in its stance against permitting U.S.-domiciled broker-dealers to directly engage with Bitcoin.

Bitcoin ETFs in Hong Kong

Sin expressed optimism that the assets under management within ETFs in Hong Kong could experience a significant surge upon the introduction of Bitcoin ETFs in the region. Comparatively, their counterparts in the United States have already amassed an aggregate size of $62 billion.

She noted that the Hong Kong ETF market currently encompasses a variety of offerings, including leveraged and inverse ETFs, actively managed funds, fixed-income ETFs, and covered call ETFs.

Highlighting recent developments, Sin mentioned that in January, Chinese asset manager Harvest Global Investments submitted an application to Hong Kong’s Securities and Futures Commission (SFC) to launch a Bitcoin spot ETF. Additionally, Hong Kong-based firm Venture Smart Financial Holdings also expressed interest in venturing into this space.

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