Honk Kong could beat the US in allowing in-kind creations and redemptions for spot Bitcoin ETFs
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■ Hong Kong is planning to allow in-kind creations for spot Bitcoin ETFs, according to a report on Bloomberg.
■ SEC pushed for cash creates, proposing that broker-dealers cannot deal in Bitcoin, unlike exchanges.
■ Issuers continue to hold out hope for in-kind creates in the US down the road, among them Valkyrie.
During the heat of the spot Bitcoin exchange-traded funds (ETFs) race in December 2023, the issue of in-kind redemptions (crypto) versus cash redemptions came up. As it happened, however, the referee in the match, which was the US Securities & Exchange Commission (SEC) decided cash creates was the way to go. While this eventually went into effect, the subject is back again.
Honk Kong aims to allow in-kind creates
A report on Bloomberg indicates that the Hong Kong Securities & Futures Commission (SFC) is aiming to allow in-kind creates and redemptions for spot Bitcoin ETFs. If it does happen, Hong Kong would beat the US, which continues with the cash creates modus operandi.
In the US it is cash in, Bitcoin ETF out, while Hong Kong aims for Bitcoin in, ETF out. This could be an opportunity for the market.
According to ETF analyst Eric Balchunas, if Hong Kong follows through with this plan, it could help spark the increase in assets under management (AUM) and volume in the fast-growing region.
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
— Eric Balchunas (@EricBalchunas) March 26, 2024
On the question of how Hong Kong ETFs could be a far more bullish catalyst than the US ETFs, Balchunas advises that the US is a far bigger market compared to Hong Kong.
Let’s not get crazy now. HK tiny vs US
— Eric Balchunas (@EricBalchunas) March 26, 2024
However, “Crypto is Macro Now” newsletter author Noelle Acheson argues, “The Asian crypto market is much larger than the US crypto market in terms of volume,” adding that the interest in in-kind ETFs could mean:
● There is less 'new money' coming into the ecosystem.
● There is deeper familiarity with crypto assets in the region.
Notwithstanding, all of this just adds to global institutional demand for Bitcoin. At some point, all this culminates to a function of more demand than supply, which already explains the melt-up in the Bitcoin price in 2024.
Meanwhile, spot BTC ETF issuers such as Valkyrie (BRRR) continue to hold out hope that the US SEC would allow in-kind creations and redemption in the US. In the firm’s fourth amendment to its spot BTC ETF application around mid-December, Valkyrie highlighted that it will also be doing cash creates, if approved, adding, “subject to in-kind regulatory approval.”
Valkyrie also doing cash-only (with hope of in-kind approval down road). More evidence SEC is saying: Cash Create or You Will Wait
— Eric Balchunas (@EricBalchunas) December 14, 2023
Notably, most issuers, if not all, were inclined to in-kind creations, but prioritized approval. At the time, Balchunas supported cash creates, saying, “Cash creates makes sense [in my opinion] because broker dealers can’t deal in bitcoin.”
Cash creates makes sense IMO bc broker dealers can’t deal in bitcoin so doing cash creates puts onus on issuers to transact in bitcoin and keeps broker dealers from having to use unregistered subsidiaries or third party firms to deal w the btc. Less limitations for them overall
— Eric Balchunas (@EricBalchunas) November 17, 2023
Why the SEC went for cash-creates
A series of misconceptions had the SEC worried about what in-kind or crypto redemptions would ensue. Among the key concerns were money laundering, according to Charles Gasparino, senior correspondent with Fox Business News. Gasparino added that SEC wanted cash creates as only issuers (not intermediaries) would handle BTC, keeping unregistered broker dealers away.
BREAKING Update on BTC Spot ETF: Firms believe @SECGov will rule after Jan 8; they feel confident the SEC will approve but with a twist; unlike normal ETF's you can only purchase shares with cash; SEC worried about ETF's being used as a vehicle for money laundering Story coming
— Charles Gasparino (@CGasparino) December 20, 2023
As indicated in a previous article, Cash creates, which is a “much more closed system,” according to Balchunas, would require that the customer gives the issuer cash for new ETF shares, and then the issuer buys Bitcoin. Conversely, for in-kind creates, the customer gives the issuer BTC in exchange for the ETF shares.
Increasing demand for a BTC ETF would, therefore, prompt an intermediary ("the AP") to create new ETF shares. Ultimately, this would mean that either way new ETF shares translate to new Bitcoin purchases.
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