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
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.
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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.
“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.”
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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”.
“In the US, the spot bitcoin market is largely unregulated and the SEC remains somewhat sceptical about spot bitcoin transactions,” Fei said.
However, because spot virtual asset transactions on licensed virtual asset trading platforms are regulated in Hong Kong, the city’s Securities and Futures Commission (SFC) “appears to be more comfortable with virtual asset ETFs”, he added.
“Hong Kong’s regulatory environment, known for adaptability, positions it well in navigating the evolving world of digital assets,” said Dmitry Lapidus, senior liquid analyst at US venture capital firm CoinFund.
“Hong Kong is one of the few major jurisdictions in the world that has a clear vision on regulating virtual assets now, and I truly believe this move will continue to serve Hong Kong as a global financial hub in the coming days,” said Kennix Chan, executive director at Victory Securities Company Limited.
But the city will face strong competition from jurisdictions like the US, experts noted.
The American cryptocurrency market is poised to be much larger for US and world investors, especially when the ones offering the spot cryptocurrency ETFs are finance heavyweights such as Blackrock, Fidelity, Franklin, and Invesco, said Jack Poon, professor of practice for fintech and entrepreneurship at the Hong Kong Polytechnic University.
“They have a huge existing customer base and a brand that retail investors feel comfortable with,” Poon said, adding that they are also offering low fees that issuers in Hong Kong may not be able to absorb in the long term.
