Hong Kong Beat the U.S. to the Punch: Bitcoin and Ethereum ETFs Launched First in Asia’s Financial Hub

While Wall Street dragged its feet, Hong Kong sprinted ahead—greenlighting crypto ETFs before the SEC could even finish its coffee.

Asia's financial powerhouse didn't just dip its toes in the crypto waters. It cannonballed in while U.S. regulators were still debating pool rules.

No 'wait-and-see' approach here. Hong Kong's Securities and Futures Commission fast-tracked approvals, giving institutional investors what they really wanted: regulated exposure without the custody headaches.

Meanwhile in America... *crickets*—until the inevitable FOMO approvals came months later. Classic case of 'move fast and innovate' versus 'move slow and litigate.'

One cynical take? Maybe U.S. regulators were too busy counting their T-bill coupons to notice the future arriving.

What Are In-Kind Redemptions?

In-kind redemptions allow investors to exchange ETF shares directly for the assets held in the ETF — in this case, Bitcoin or Ethereum — rather than receiving money. This process avoids extra fees and reduces the time needed for conversions, making it more appealing for large-scale or institutional investors.

Hong Kong Was First to Allow It

While the SEC is only now permitting in-kind redemptions, Hong Kong regulators had included it in their crypto ETF rulebook from the start. Back in late 2023, the SFC confirmed that crypto ETFs launching in Hong Kong in April 2024 could offer in-kind redemptions. This early approval was based on a few key conditions:

• ETF providers had to work with licensed local crypto exchanges.

• They also had to use approved crypto custody services to keep assets safe.

Unlike the U.S., there was no legal confusion in Hong Kong over whether Ethereum was a security. This made it easier for regulators to MOVE forward without major legal debates.

Why the U.S. Delayed It

The SEC didn’t officially ban in-kind redemptions but pushed ETF providers to use only cash redemptions in early filings. The main reasons were:

• Concerns about safely transferring large amounts of crypto.

• Risks related to anti-money laundering.

• Lack of tested systems to handle in-kind redemptions securely.

There was also internal disagreement within the SEC. In January 2024, when the SEC approved spot Bitcoin ETFs, Commissioner Mark Uyeda criticized the cash-only rule. He noted that commodity ETFs like gold already allow in-kind redemptions, so crypto should not be treated differently. Uyeda warned that the SEC’s reasoning was unclear and might set a bad example for future regulations.

Hong Kong’s Clearer Approach

Hong Kong didn’t face the same policy confusion. By allowing in-kind redemptions from the beginning and requiring strong oversight from licensed exchanges and custodians, the SFC avoided many of the issues that slowed the U.S.

Their structured, step-by-step approach helped launch crypto ETFs faster and with fewer legal hurdles. It also gave institutional investors more flexibility in how they interact with these funds.

One Complication: Tracking ETF Flows

There is one big challenge with in-kind redemptions — it makes tracking ETF inflows harder. Normally, when investors buy ETF shares with cash, data providers can easily track how much money is going into the fund. But with in-kind redemptions, there’s no cash involved, just crypto.

This creates a problem for firms like SoSoValue, which monitors ETF data. They say subscriptions made using bitcoin or Ethereum don’t show up as regular cash inflows. This can make it harder to understand how much demand there is for these ETFs.

So far, their attempts to model or estimate these inflows haven’t worked well. Unless ETF providers start publishing data for both crypto and cash flows daily, understanding investor interest will remain a guessing game.

Conclusion

The SEC’s move to allow in-kind redemptions is a big step forward for crypto ETFs in the U.S., but it’s not groundbreaking globally. Hong Kong’s regulators were ahead of the curve, having set up these rules nearly two years earlier with clear conditions and fewer legal delays.

As in-kind redemptions become more common, the next challenge will be improving transparency. Without better tracking methods, it will be hard to measure true investor demand — something both investors and analysts rely on to make smart decisions in the crypto space.