Hong Kong Was First: SEC’s In-Kind Crypto ETF Shift Echoes Earlier Hong Kong Model
The U.S. Securities and Exchange Commission (SEC) made headlines Wednesday by approving in-kind creation and redemption mechanisms for spot bitcoin and ether ETFs — a milestone move for U.S. crypto markets. But in Hong Kong, regulators had already paved the way for such activity nearly two years earlier.
The SEC’s decision allows institutional traders to directly exchange bitcoin (BTC) and ether (ETH) for ETF shares, bypassing fiat currency conversions. This streamlines operations, enhances market efficiency, and brings crypto ETFs in line with long-standing practices in commodity-based funds like those backed by gold.
While the SEC’s move marks a significant policy evolution in Washington, Hong Kong’s Securities and Futures Commission (SFC) had endorsed in-kind redemptions as early as late 2023. That guidance came ahead of the city’s crypto ETF launches in April 2024, with regulators prioritizing operational clarity and institutional safeguards from the outset.
Unlike the U.S., where custody and regulatory ambiguity around Ethereum’s classification delayed in-kind functionality, Hong Kong required ETF issuers to partner with licensed local exchanges and use approved custody solutions — a structure that offered regulatory certainty and technical readiness.
SEC Shift Follows Internal Debate and Market Pressure
Until now, U.S. crypto ETFs were restricted to cash-only creations and redemptions, adding complexity and cost for institutions. The policy faced internal opposition: SEC Commissioner Mark Uyeda, in particular, criticized the inconsistency, noting that in-kind processes are standard in commodity ETFs.
Uyeda called out the Commission’s failure to justify the deviation, arguing it created unnecessary inefficiencies and undermined investor confidence.
With the approval now in place under SEC Chair Paul Atkins, who has signaled a more open stance toward digital assets, the shift aligns U.S. policy more closely with global practices — notably those of Hong Kong and Canada.
Data Transparency the Next Challenge
Yet the adoption of in-kind transactions introduces a new challenge: flow transparency. Because crypto-based ETF subscriptions don’t generate fiat inflows, traditional tracking metrics may no longer offer a complete picture.
Crypto data firm SoSoValue has flagged the issue, noting that in-kind flows can distort daily inflow/outflow reporting. Without standardized disclosures separating crypto and cash inflows, institutional investors and analysts may find it harder to gauge true market sentiment.
Market Overview
- Bitcoin (BTC): Trading above $117,500 following a modest rebound. Gains remain capped amid persistent ETF outflows, profit-taking near $118K, and macroeconomic pressures.
- Ethereum (ETH): Holding above $3,700. Institutions increasingly see Ether as a high-conviction asymmetric bet, according to Bizantine Capital’s March Zheng.
- Gold: Recovered to $3,334, breaking a four-day losing streak as traders anticipate steady Fed policy following weak U.S. job data.
- Nikkei 225: Flat at the open amid mixed regional sentiment. U.S. Commerce Secretary Howard Lutnick confirmed Trump’s upcoming tariff deadline remains on schedule.
- S&P 500: Ended lower on Tuesday, snapping a six-day winning streak as investors digest earnings, economic data, and Wednesday’s Fed rate decision.
