In-kind model for Bitcoin ETFs may be next for Hong Kong's booming trade market
The expected introduction could tap into the "much larger" Asian crypto market.
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Hong Kong is set to greenlight in-kind creations for Bitcoin ETFs, according to Bloomberg ETF analysts. This development is expected to reduce costs, offer potential tax benefits, and ultimately attract more capital and boost trading volume.
Looks like Hong Kong is going to allow in-kind creations and redemptions for spot bitcoin ETFs in 2Q (unlike US which is cash creations only), which could help spark aum and volume in the fast-growing region via new note today from @Rebeccasin_SK https://t.co/IxcdWEFDvC pic.twitter.com/sDsS4nbzGi
— Eric Balchunas (@EricBalchunas) March 26, 2024
As noted by Bloomberg analyst Eric Balchunas, the traded value of Hong Kong ETFs has seen an uptick over the past few years. The approval of both in-kind and cash-creates models could replicate the success of ETFs in the US and attract investment.
Anticipation builds as Hong Kong edges closer to approving its first spot Bitcoin ETFs. In December last year, the Securities and Futures Commission (SFC) of Hong Kong and the Hong Kong Monetary Authority (HKMA) issued new rules addressing the possibility of investment funds, brokerages, and asset managers to offer Crypto ETFs.
Livio Weng, COO of HashKey Group, told local media outlet Caixin that over ten fund companies are in advanced stages of preparation to launch spot ETFs in Hong Kong. Weng expects a strong push towards launching Hong Kong spot ETFs in the coming months.
By the end of January, Harvest Fund (HFM), an asset manager based in China, filed for a spot Bitcoin ETF with the Hong Kong SFC. Other regional financial institutions have also shown interest in launching spot Bitcoin ETF products in Hong Kong.
A good market opportunity
In the US, where several spot Bitcoin ETFs started trading earlier this year, such products are limited to cash-only transactions. The cash model treats Bitcoin ETF shares like cash, selling the Bitcoin to fulfill the redemption while the in-kind model treats shares more like actual Bitcoin, transferring the underlying asset directly.
For BlackRock, the world’s leading ETF issuer, the in-kind redemption model is preferred since it is generally more efficient and less costly.
“…exchange-traded products for all spot-market commodities other than bitcoin, such as gold and silver, employ in-kind creations and redemptions with the underlying asset,” wrote BlackRock in its iShares Bitcoin ETF prospectus. “…it is generally more efficient, and therefore less costly, for spot commodity exchange-traded products to utilize in-kind orders rather than cash orders, because there are fewer steps in the process and therefore there is less operational risk involved when an authorized participant can manage the buying and selling of the underlying asset itself.”
Hong Kong’s expected decision to embrace both in-kind and cash-create models for Bitcoin ETFs could give it an edge over the global ETF competition. According to Noelle Acheson, author of the “Crypto is Macro Now” newsletter, this potentially unlocks a new wave of investment from across China.
“The Asian crypto market is much larger than the US crypto market in terms of volume,” stated Acheson. “Even a tiny percentage of Chinese investors finding a legal way [to invest in bitcoin] would be significant.”
Acheson suggests the high volume could reflect two possibilities: either a saturation of new investors in Asia, or a deeper regional familiarity with crypto. This comfort level could fuel mainstream adoption and attract significant investments through approved channels like listed ETFs in Hong Kong.
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