Hong Kong eyes ‘more flexible’ path in regulating spot cryptocurrency ETFs as US races ahead with approvals

A key difference between Hong Kong’s proposed rules for spot cryptocurrency ETFs and the US is that the city will allow both cash and in-kind subscriptions

The SFC and Hong Kong Monetary Authority’s plan to authorise spot cryptocurrency ETFs has given the industry optimism about the city’s prospects of becoming a cryptocurrency hub

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Stacks of cryptocurrency coin representations are set against the backdrop of the Hong Kong flag. Photo: Shutterstock Images

Published: 7:00am, 20 Jan 2024Updated: 8:32am, 20 Jan 2024

Hong Kong is set to develop a more flexible regime for cryptocurrency exchange-traded funds (ETFs), even though the US leads in both approval speed and market size, experts said.

A key difference between Hong Kong’s proposed rules for spot cryptocurrency ETFs and products approved in the US is that Hong Kong will allow both cash and in-kind subscriptions. Under such rules, participating dealers can directly use bitcoin to subscribe to or redeem the ETF’s shares, whereas in the US, such subscriptions and redemptions are only allowed with cash.

The different approach reflects a divergence of virtual asset regulatory frameworks, where the US Securities and Exchange Commission (SEC) “appears reluctant to allow licensed dealers to touch bitcoin” when subscribing for and redeeming ETF shares because spot bitcoin trades are unregulated in the US, according to Andrew Fei, a partner at King & Wood Mallesons in Hong Kong.

Regulators in Hong Kong last month said that they will allow retail access to spot virtual asset ETFs, and are willing to accept applications from funds hoping to offer such products to the public.

After nine spot bitcoin ETFs in the US, offered by fund giants including BlackRock and Fidelity, attracted nearly US$2 billion in their first three days of trading, virtual asset industry participants in Hong Kong have urged the Hong Kong government to speed up the approval of the city’s own offerings.

“I hope that Hong Kong, amid the rapid development and intense competition in the virtual asset sector, can seize a spot globally as quickly as possible,” Legislative Council member Johnny Ng Kit-chong wrote in a post on X, formerly Twitter, last week. “[Hong Kong should] strive to be the first to implement relevant policies and products particularly in Asia.”

In a statement last week, SEC chair Gary Gensler said that despite its approval of spot bitcoin ETFs, the regulator “did not approve or endorse bitcoin”, which is “primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing”.