The financial world is watching closely as Hong Kong takes a bold step forward in the crypto asset space. On April 15, the Securities and Futures Commission (SFC) granted in-principle approval for three institutions to launch spot Bitcoin and Ethereum exchange-traded funds (ETFs). This milestone not only marks a significant regulatory advancement but also positions Hong Kong as a global leader in digital asset innovation—surpassing even the U.S. by including Ethereum and permitting in-kind subscriptions.
OSL, Asia’s first fully licensed virtual asset trading platform (VATP), plays a pivotal role in this transformation. Two of the three approved ETF issuers have partnered with OSL for trading and custody services, underscoring its central position in Hong Kong’s evolving crypto ecosystem.
This article dives deep into the implications of this regulatory breakthrough, featuring exclusive insights from Patrick Pan, CEO of OSL, and Wayne Huang, Head of OSL’s ETF business.
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Why Did Hong Kong Move Faster Than the U.S.?
One of the most pressing questions is why Hong Kong was able to approve both Bitcoin and Ethereum spot ETFs so swiftly—especially compared to the United States, where Ethereum ETFs remain stalled.
According to OSL, the answer lies in clarity of regulation.
"Hong Kong has always maintained a clear and consistent regulatory framework," explained Wayne Huang. "There's one primary regulator—the SFC—and they’ve clearly defined what constitutes a security versus a non-security."
This distinction is critical. By classifying Bitcoin (BTC) and Ethereum (ETH) as non-securities, the SFC paved the way for retail access and, subsequently, ETF development. In contrast, U.S. regulators like the SEC remain divided on whether ETH qualifies as a security, creating regulatory gridlock.
The result? A streamlined path in Hong Kong versus prolonged debate in the U.S.
Is Ethereum Considered a Security in Hong Kong?
No—neither Bitcoin nor Ethereum is classified as a security under Hong Kong law.
This determination isn’t arbitrary. Every time a new token is listed on a licensed exchange like OSL, a legal opinion must be submitted to the SFC, clearly stating whether the asset meets the definition of a security.
To date, OSL has successfully listed over a dozen tokens—including AAVE, BAT, BCH, COMP, GRT, LINK, LTC, UNI, USDC, and USDT—all deemed non-securities after rigorous review.
This established precedent gives regulators confidence in expanding financial products like ETFs without fear of legal ambiguity.
Why Does Hong Kong Allow In-Kind Subscriptions?
A major differentiator between Hong Kong and U.S. ETF structures is the allowance of in-kind subscriptions—meaning investors can contribute actual BTC or ETH to acquire ETF shares.
In the U.S., such mechanisms are avoided due to concerns about money laundering through unregulated exchanges. However, Hong Kong mitigates these risks through strict regulatory requirements:
- All transactions must occur via SFC-licensed VATPs or HKMA-recognized financial institutions.
- Robust KYC (Know Your Customer) and AML (Anti-Money Laundering) checks are mandatory for all deposits and withdrawals.
- Participating Dealers (PDs) must hold an enhanced Type 1 license.
These safeguards ensure that only compliant, traceable assets enter the ETF ecosystem—making in-kind creation both secure and efficient.
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What Does “In-Principle Approval” Mean?
The term refers to conditional approval. While the SFC has cleared the core structure of the ETFs, final steps remain before launch:
- Finalizing documentation
- Completing Hong Kong Exchange (HKEX) listing procedures
- Setting up investor onboarding processes
Despite this, the green light signals strong regulatory support. The remaining work is procedural—not substantive—meaning product launch is expected within weeks rather than months.
Can Mainland Chinese Investors Participate?
Currently, Southbound investors via Stock Connect (from mainland China to Hong Kong) cannot invest in crypto-related ETFs.
While some early reports speculated that up to $25 billion in mainland capital could flow into these products through Southbound channels, industry insiders—including multiple ETF issuers—dismiss this as unrealistic.
Chinese capital entering Hong Kong markets must comply with strict cross-border controls under Shanghai-Hong Kong and Shenzhen-Hong Kong Connect programs. Cryptocurrency exposure remains prohibited under current mainland regulations.
Initial demand will therefore come primarily from offshore institutional and retail investors.
Will More Tokens Be Added to Future ETFs?
Absolutely—and it's already part of the roadmap.
The SFC is actively encouraging innovation and market exploration. However, any new token must first be available for retail trading on licensed platforms before being considered for ETF inclusion.
Given that BTC and ETH have been accessible to Hong Kong retail investors since June 2023, their selection for the first wave of ETFs reflects high market consensus.
Looking ahead, tokens like Solana (SOL), Cardano (ADA), or Polkadot (DOT) could follow—once they gain sufficient trading history and regulatory clarity.
Additionally, fund managers are already developing structured products, including leveraged or yield-bearing ETFs, which may launch after the initial spot offerings stabilize.
How Does Hong Kong Compare to Europe and Canada?
While Canada and certain European markets launched crypto ETFs earlier, their trading volumes have been modest due to smaller investor bases and less crypto-native interest.
Hong Kong offers distinct advantages:
- Proximity to high-net-worth Asian investors
- Deep familiarity among Chinese-speaking communities
- Strong institutional infrastructure
- Regulatory alignment with global standards
As Patrick Pan noted: "Bitcoin ETFs attract not just traditional finance players but also experienced crypto natives. And within that group, the proportion of Chinese-speaking investors is significant."
This cultural and geographic advantage positions Hong Kong to surpass smaller markets like Switzerland or Canada in liquidity and adoption.
Spot vs. Futures ETFs: What’s the Difference?
Understanding the difference is crucial for investors:
| Feature | Spot ETF | Futures ETF |
|---|---|---|
| Underlying Asset | Actual BTC/ETH held in custody | Futures contracts (expiring monthly) |
| Management Complexity | Low – passive holding | High – requires rolling contracts |
| Fees | Lower expense ratios | Higher due to operational complexity |
| Price Tracking | Closely mirrors spot price | Subject to basis risk and roll yield |
In short: spot ETFs offer simpler, more accurate exposure at lower cost—making them ideal for long-term holders and conservative investors.
Direct Crypto Ownership vs. ETF Investment
Investors face a choice: buy Bitcoin directly or gain exposure via ETF.
Here’s how they compare:
Direct Purchase:
- Requires account on a licensed VATP (e.g., OSL)
- Full custody of private keys (self-hosted wallets)
- Higher technical barrier
- Greater control but increased responsibility
ETF Route:
- Accessible through traditional brokerage accounts
- No need to manage keys or worry about security
- Seamless integration with stocks, bonds, and other assets
- Ideal for beginners or regulated institutions
For many retail users, ETFs lower the entry barrier significantly. For institutions restricted from holding digital assets directly, ETFs provide a compliant backdoor.
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Frequently Asked Questions (FAQ)
Q: When will the Hong Kong Bitcoin and Ethereum ETFs start trading?
A: Trading is expected within weeks following final approvals from HKEX and completion of operational setup.
Q: Are these ETFs available to U.S. investors?
A: Not directly through U.S. brokers unless approved by the SEC. However, offshore U.S. investors may access them via international brokerage accounts.
Q: Do spot ETFs pay dividends or yield?
A: No. Unlike staking-based products, standard spot ETFs do not generate yield. They track price appreciation only.
Q: Who can create or redeem ETF shares?
A: Only authorized Participating Dealers (PDs) with enhanced Type 1 licenses can perform creation/redemption, typically using either cash or physical BTC/ETH.
Q: Is there counterparty risk in these ETFs?
A: Custodial risk is minimized through use of regulated custodians like OSL and Bank of China International. However, investors should always assess issuer credibility.
Q: How are gains taxed?
A: Tax treatment depends on jurisdiction. Hong Kong currently has no capital gains tax, but investors elsewhere should consult local advisors.
Final Thoughts
Hong Kong’s approval of Bitcoin and Ethereum spot ETFs represents more than just a financial product launch—it signals a strategic move to become Asia’s premier digital asset hub.
With clear regulation, trusted infrastructure, and growing market confidence, the region is poised to lead the next phase of crypto adoption.
For global investors, these ETFs offer a secure, regulated gateway into digital assets—without leaving their familiar brokerage environment.
And with further innovation on the horizon—from new tokens to structured products—the journey has only just begun.