Hong Kong’s Early Embrace of In-Kind Redemptions Highlights Regulatory Gap With U.S.

While the U.S. Securities and Exchange Commission (SEC) only recently approved in-kind redemptions for bitcoin and ether exchange-traded funds (ETFs), Hong Kong regulators had embraced the mechanism from the start.

On Wednesday, the SEC announced that institutional investors can now create and redeem ETF shares directly in BTC or ETH, bypassing fiat currency and improving operational efficiency. However, Hong Kong’s Securities and Futures Commission (SFC) had allowed this model as early as late 2023, well before the city launched its crypto ETFs in April 2024.

The SFC’s approval was rooted in technical safeguards: ETF issuers were mandated to work with licensed crypto exchanges and use compliant custody providers. This structure helped the city avoid debates around asset classification—such as the U.S. dispute over whether Ether is a security—and eliminated key regulatory bottlenecks.

In contrast, the SEC initially required all spot crypto ETFs to operate with cash-only creations and redemptions, citing concerns over custody, AML risks, and settlement processes. ETF sponsors were forced to remove in-kind provisions from early filings.

Commissioner Mark Uyeda challenged the cash-only stance during the SEC’s January 2024 bitcoin ETF approval, noting that gold-backed ETFs routinely use in-kind redemptions. He criticized the agency for failing to justify the deviation from established ETF practices, warning of regulatory inconsistency.

By enabling in-kind flows from the outset, Hong Kong’s regulator moved with greater clarity and efficiency, avoiding the friction seen in the U.S. rollout. Its pairing of flexible redemption mechanics with strict oversight created a more coherent policy framework.

Flow Tracking Challenges Ahead

Despite regulatory progress, the shift to in-kind redemptions introduces new transparency challenges. Data provider SoSoValue warns that physical bitcoin subscriptions don’t generate traditional cash inflows and can’t be easily captured in daily ETF flow statistics.

Attempts to model these flows have so far fallen short, raising concerns about how investor sentiment will be measured unless issuers begin publishing detailed flow breakdowns in both crypto and fiat.

Market Update

• Bitcoin (BTC): Trading above $117,500 after a modest rebound. Upside remains capped amid ETF outflows, whale profit-taking near $118K, and persistent macro pressures including Fed hawkishness and a firm dollar.
• Ethereum (ETH): Holding above $3,700. “Ether has proven itself alongside Bitcoin as a battle-tested asset and a compelling asymmetric bet for institutions,” said March Zheng, General Partner at Bizantine Capital.
• Gold: Rose to $3,334 on Tuesday, ending a four-day decline as markets priced in steady rates ahead of the Fed meeting despite soft U.S. labor data.
• Nikkei 225: Opened flat amid mixed sentiment across Asia-Pacific markets. U.S. Commerce Secretary Howard Lutnick confirmed Trump’s tariff deadline will go ahead Friday.
• S&P 500: U.S. stocks closed lower, ending a six-day record rally, as investors weighed corporate earnings and braced for the upcoming Fed decision.