The approval and listing of Bitcoin and Ethereum spot ETFs have become a major focus in Hong Kong's financial market. These ETFs offer a regulated and secure way for investors to gain exposure to leading cryptocurrencies without directly holding the assets.
For virtual asset investors, the in-kind subscription feature is particularly significant. It provides a compliant channel for converting cryptocurrencies into regulated financial products, which is crucial for boosting market confidence, especially when traditional banking systems remain cautious about direct crypto transactions.
This guide compiles essential information about in-kind subscriptions for Hong Kong's Bitcoin and Ethereum spot ETFs through Victory Securities, the first participating dealer authorized for such transactions. We will cover account opening requirements, the subscription process, fees, potential arbitrage opportunities, and tax considerations to help you prepare.
Why Consider Bitcoin and Ethereum Spot ETFs?
For virtual asset investors, security is always the top priority. The blockchain ecosystem is prone to hacking and scams, which can lead to irreversible losses. Additionally, regulatory uncertainty poses ongoing policy risks. Spot ETFs effectively address both concerns.
ETF issuers collaborate with reputable, large-scale custodians to mitigate hacking and fraud risks. They also manage private keys and wallets on behalf of investors, providing technical convenience. Moreover, as these products are approved and regulated by Hong Kong's Securities and Futures Commission (SFC), they offer a legitimate and compliant investment option for traditional institutions.
Notably, while the U.S. SEC has not yet approved a spot Ethereum ETF, Hong Kong's move to list such products provides institutional investors with additional exposure—a market opportunity that shouldn't be overlooked.
Victory Securities: The First-Mover in Primary Market In-Kind Subscriptions
According to SFC requirements, in-kind subscriptions and redemptions for Bitcoin and Ethereum spot ETFs must be processed through SFC-recognized institutions that transfer virtual assets to and from the fund's custody account. Victory Securities, with its advanced compliance infrastructure, has become the first participating dealer in Hong Kong authorized to handle in-kind subscriptions in the primary market.
In Hong Kong's virtual asset regulatory landscape, Victory Securities has established a first-mover advantage. It holds Type 1 (dealing in securities), Type 4 (advising on securities), and Type 9 (asset management) licenses for virtual assets, making it the first brokerage to offer such services to retail investors.
Recently, Victory Securities also became the first SFC-licensed brokerage approved for crypto-in and crypto-out transactions. It launched VictoryX, an app that integrates virtual asset trading with Hong Kong and U.S. stock markets. The app's timely release aligns with the ETF listing schedule, positioning Victory Securities for rapid growth.
Detailed Guide for Investor In-Kind Subscriptions
Once the first batch of Bitcoin and Ethereum spot ETFs are approved, Victory Securities will be the sole channel for primary market in-kind subscriptions. Below, we outline the practical details to help investors navigate the process.
Investor Eligibility Requirements
In Hong Kong, ETF purchases require buying a minimum number of fund units, which affects transaction costs and entry thresholds.
Critically, according to the SFC's joint circular, virtual asset-related products must not be sold to Mainland China investors. These products are not offered directly or indirectly to Mainland Chinese entities or individuals without prior approval from Mainland authorities. The possibility of using southbound capital flows for investing in these ETFs remains uncertain and unlikely for now.
Victory Securities Account Opening Requirements
To open an account, visit the Victory Securities website and navigate to "Customer Service > Open an Account" for guidance. Alternatively, download the VictoryX app and click "Open Account Now" to start the process.
For Mainland China residents opening individual accounts, prepare the following:
- Mainland China second-generation ID card
- A debit card under the same name from a Mainland bank (for identity verification only, not for funding the account)
- Email address for notifications and account information
- If your current address differs from your ID card, provide a copy of a proof of address issued within the last three months (e.g., utility bill, bank statement)
- A Hong Kong bank account for fund transfers
For Hong Kong residents opening individual accounts, prepare:
- Hong Kong ID card
- Proof of address issued within the last three months
- Email address
- Hong Kong bank account
For Hong Kong companies opening corporate accounts, prepare:
- Board resolution copy
- ID/passport copies and recent proof of address for all directors, authorized traders, signatories, and ultimate beneficial owners (holding 10% or more shares)
- Certificate of Incorporation (CI) and any name change certificates
- Articles of Association
- Company address proof
- Company bank account proof
- Latest annual return, subsequent notices of change of directors/secretaries, and share allocation reports
- Valid Business Registration Certificate (BR)
- Shareholding structure chart (signed by a director)
For overseas companies opening corporate accounts, prepare:
- Board resolution copy
- ID/passport copies and recent proof of address for all directors, authorized traders, signatories, and ultimate beneficial owners
- Certificate of Incorporation and any name change certificates
- Articles of Association
- Company address proof
- Company bank account proof
- Register of directors and shareholders
- Certificate of incumbency for directors (issued within the last six months)
- Shareholding structure chart (signed by a director)
To open a virtual asset trading account, after completing the securities account opening, submit four signed forms:
- Supplemental agreement for virtual asset trading
- Additional risk disclosure statement for virtual assets
- Risk tolerance questionnaire
- Virtual asset knowledge and experience questionnaire
In-Kind Subscription Process for Bitcoin and Ethereum ETFs
After opening a securities account, investors holding Bitcoin or Ethereum can follow these steps for in-kind subscription:
- Open Account: Complete account opening with Victory Securities.
- Deposit Crypto: Transfer Bitcoin or Ethereum to Victory Securities' exchange account.
- Execute Subscription: After suitability assessment, the investment manager instructs Victory Securities to use the deposited crypto to subscribe for ETF shares.
- Settlement: Victory Securities transfers the ETF shares to the client's account and sends confirmation via email.
Cash Subscription Process
New investors can opt for cash subscriptions. Although this carries higher risks compared to in-kind subscriptions, it still offers better security and compliance than direct crypto investments.
- Open Account: Complete account opening with Victory Securities.
- Place Order: Instruct Victory Securities to subscribe.
- Transfer Funds: Deposit funds to Victory Securities, which are then forwarded to the ETF's custodian bank.
- Settlement: Shares are allocated via HKSCC to Victory Securities and then to the client, with confirmations emailed.
Fee Structure
Fees for subscriptions may include management fees, custody fees, and transaction charges. Investors should review the specific ETF prospectus for detailed fee schedules, as they vary by product and service level.
Arbitrage Opportunities
In-kind subscriptions may present arbitrage opportunities. Shares purchased in the primary market often trade at a premium in the secondary market due to higher liquidity and demand. This allows investors to potentially profit by selling at a higher price after subscription.
Even if secondary market performance is weak, investors can redeem their shares in-kind, recovering their original crypto holdings with minimal loss risk.
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Tax Considerations
Taxation of Bitcoin ETF investments involves capital gains tax, income tax, and withholding tax, depending on the ETF's domicile, the investor's residency, and the investment jurisdiction. Selling ETF shares may trigger capital gains tax, while in-kind redemptions typically do not.
Hong Kong taxes only profits derived from Hong Kong. Capital gains are generally not taxed for individuals or corporations. However, if shares are held briefly, gains might be deemed trading profits and subject to profits tax.
- Individuals: Profits from selling Bitcoin ETFs are usually not taxed. Dividends from Hong Kong-based ETFs are also generally tax-free.
- Corporations: Profits from selling ETFs may be subject to profits tax. The first HKD 2 million of assessable profits is taxed at 8.25%, with any excess at 16.5%. Unincorporated businesses face rates of 7.5% and 15%, respectively. Dividend income is typically not taxed.
Frequently Asked Questions
What is an in-kind subscription for a spot ETF?
In-kind subscription allows investors to use existing Bitcoin or Ethereum to directly purchase ETF shares, rather than using cash. This method provides a seamless way to convert crypto holdings into regulated securities.
Who is eligible to subscribe to these ETFs in Hong Kong?
Hong Kong residents and certain institutional investors are eligible. Mainland China investors are prohibited from purchasing these products without specific approvals from Mainland authorities.
How does Victory Securities support in-kind subscriptions?
As the first SFC-licensed dealer approved for primary market in-kind subscriptions, Victory Securities facilitates the entire process, from crypto deposit to share allocation, ensuring compliance and security.
Are there risks involved with in-kind subscriptions?
While generally lower risk than direct crypto trading, in-kind subscriptions still involve market volatility. However, the ability to redeem in-kind helps protect against total loss of capital.
What are the tax implications for Hong Kong investors?
Hong Kong does not tax capital gains for individuals. Corporate investors may face profits tax on short-term gains. Dividends from Hong Kong-based ETFs are typically tax-free.
Can international investors participate?
International investors can participate if they meet the account requirements and have a Hong Kong bank account. Specific eligibility may vary based on residency and regulatory considerations.
Conclusion
The launch of Bitcoin and Ethereum spot ETFs marks the beginning of a new era in virtual asset investing, with Hong Kong positioning itself as a competitive hub alongside Western markets. Although smaller in scale, Hong Kong's clear regulatory framework and supportive policy environment foster innovation and integration with traditional finance.
The potential for growth and the unique advantages of in-kind subscriptions make this a significant development. As the market evolves, Hong Kong's role in the global crypto landscape will be one to watch closely.