Hong Kong is getting ready to follow the United States’ lead in approving Bitcoin spot ETFs for public trading, analysts at Bloomberg Intelligence suggest.
The region’s regulators may go a step further than their Western counterparts, however, by permitting those funds to use an “in-kind” redemption model.
What Are ‘In Kind’ Bitcoin ETFs?
The redemption model refers to the internal plumbing of how a Bitcoin ETF’s shares track the price of spot-traded BTC. All Bitcoin spot ETFs must hold enough BTC to back all shares issued by the fund, and market makers must be able to redeem those shares for their equivalent BTC value.
This can be accomplished in two ways. One is an ‘in-kind’ redemption model, where market makers can adjust the supply of ETF shares on the market, send them back to the ETF issuer, and receive BTC in return. By contrast, an ‘in-cash’ model creates a lengthier process in which market makers instead receive cash equal to the amount of Bitcoin represented by their shares.
According to analyst Rebecca Sin, the unique ‘in-kind’ characteristic could be a big opportunity for Hong Kong’s market.
“In the US it’s cash in, Bitcoin ETF out, while Hong Kong aims for Bitcoin in, Bitcoin ETF Out,” she explained.
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
Before receiving approval in January, Bitcoin ETF sponsors were at odds with the Securities and Exchange Commission (SEC) in a fight to allow in-kind redemptions for their ETFs.
Fund managers like BlackRock argued that their in-kind model would boast lower transaction costs, less operating risk, and resistance to market manipulation compared to an in-cash model. Others noted that an in-kind model could involve fewer tax complications that arise from converting BTC into cash.
The SEC ultimately got its way, however, firmly against the idea of letting U.S. domiciled broker-dealers interact with Bitcoin directly.
Bitcoin ETFs in Hong Kong
Sin added that Hong Kong’s assets under management within ETFs could surge considerably with the launch of Bitcoin ETFs in the region. Their U.S.-based counterparts, for example, have already reached an aggregate size of $62 billion.
She said the Hong Kong ETF market already includes “leveraged an inverse, Bitcoin, actively managed, and fixed-income ETFs,” alongside covered call ETFs.
In January, Chinese asset manager Harvest Global Investments applied with Hong Kong’s Securities and Futures Commission (SFC) to launch a Bitcoin spot ETF, alongside Hong Kong-based firm Venture Smart Financial Holdings.
The next 3 bullish catalysts for #Bitcoin outside of monetary policy.
Halving – April
Upcoming 13F filings for the Bitcoin ETFs – April/May
Hong Kong ETF – April
(ETF assets up 5 Fold in 4 months in HK).East and West biding for the corn
— James Van Straten (@jvs_btc) March 1, 2024