Asia Morning Briefing: SEC’s In-Kind ETF Approval Echoes Framework Long Used in Hong Kong

SEC Greenlights In-Kind Redemptions for Crypto ETFs — But Hong Kong Got There First

The U.S. Securities and Exchange Commission (SEC) made waves this week by approving in-kind creation and redemption mechanisms for spot bitcoin and ether ETFs — a long-awaited shift aimed at improving efficiency and institutional participation. Yet, in Hong Kong, such functionality has been in place since the beginning.

On Wednesday, the SEC announced that authorized participants — typically large institutions that help manage ETF liquidity — may now create and redeem shares of bitcoin and ether ETFs using crypto assets directly, rather than through cash. The move eliminates unnecessary fiat conversions, reduces operational friction, and aligns crypto ETFs with traditional commodity-backed funds.

However, this structure has been standard in Hong Kong since late 2023. Well before the city’s crypto ETFs launched in April 2024, the Securities and Futures Commission (SFC) outlined its support for in-kind redemptions in a regulatory circular. This early clarity was enabled in part by Hong Kong’s framework, which mandates that ETF issuers partner with licensed crypto exchanges and approved custodians — reducing regulatory ambiguity.

Unlike the U.S., Hong Kong didn’t grapple with questions around Ether’s security classification or logistical concerns around custody. In contrast, the SEC initially blocked in-kind redemptions, forcing ETF sponsors to adopt a cash-only model when spot bitcoin ETFs were first approved in January 2024.

That stance was not without criticism. SEC Commissioner Mark Uyeda publicly opposed the approach during the initial ETF approvals, questioning why crypto products were treated differently from gold and other commodities, which routinely allow in-kind redemptions.

“The Commission never adequately explained why it viewed cash-only redemptions as ‘non-novel’,” Uyeda said at the time, warning that the policy divergence risked setting a problematic precedent.

Policy Clarity vs. Regulatory Caution

The contrast between the SEC and the SFC highlights broader differences in regulatory philosophy. While the U.S. took a cautious, iterative path — often driven by internal disagreements and political pressure — Hong Kong rolled out a more cohesive strategy from day one, balancing innovation with strict oversight.

By combining in-kind functionality with mandatory local partnerships and custody standards, the SFC created a clear pathway for institutional involvement without the need for policy reversals down the road.

New Challenges: Tracking ETF Flows

Despite the efficiency gains, in-kind redemptions introduce a new complexity: reduced visibility into fund flows. According to crypto analytics firm SoSoValue, crypto-denominated subscriptions do not generate fiat inflow data — complicating traditional flow tracking metrics.

While the firm has experimented with alternative tracking models, it admits that no reliable solution has emerged so far. Unless ETF issuers voluntarily disclose daily inflow and outflow data in both crypto and cash terms, market participants may struggle to assess investor sentiment accurately.

Market Snapshot

• Bitcoin (BTC): Trading near $117,500 following a mild rebound, though upside remains capped by ongoing ETF outflows, macroeconomic pressures, and profit-taking above $118K.
• Ethereum (ETH): Holding above $3,700. “Institutions increasingly view Ether as a compelling asymmetric hedge alongside Bitcoin,” noted March Zheng, General Partner at Bizantine Capital.
• Gold: Recovered to $3,334 after a multi-day slump, buoyed by expectations that the Fed will keep rates steady despite soft labor market data.
• Nikkei 225: Flat at the open amid mixed Asia-Pacific market sentiment. U.S. Commerce Secretary Howard Lutnick confirmed that Trump’s tariff deadline will proceed on Friday.
• S&P 500: Closed lower Tuesday, ending a six-day winning streak as investors digested mixed earnings and awaited Wednesday’s Fed decision.

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