Hong Kong Contemplates Supporting Ether ETFs, Deviating from US Position
The Securities and Futures Commission (SFC) of Hong Kong is reportedly contemplating the inclusion of an Ether (ETH) staking option for spot ETH exchange-traded fund (ETF) issuers, according to Bloomberg. The financial regulator is currently assessing whether ETH ETF issuers should be allowed to stake Ether to generate passive income. Earlier this year, Hong Kong approved a Bitcoin ETF, following the United States’ approval of 10 spot ETFs more than three months prior.
The SFC is focused on determining whether licensed platforms should be permitted to stake Ether. Discussions on this topic have taken place with the country’s crypto ETF issuers after several proposals were made. The regulator is still in the discussion phase and has not set a definitive timeline for a decision or implementation.
Unlike Bitcoin, Ethereum operates on a proof-of-stake consensus protocol, which enables users to stake their assets on the network. This contributes to network security and offers a return of around 3% at present.
If approved, staking the Ether held in Hong Kong spot Ethereum ETFs could provide investors with passive income in addition to potential capital gains. This could potentially support the city’s aspirations to become a global crypto hub. However, it remains uncertain whether allowing staking will significantly boost the currently weak demand for ETFs in the region.
The proposal to introduce staking comes at a time when the demand for ETFs in Hong Kong has been notably lackluster. The city launched Asia’s first spot Bitcoin and Ethereum ETFs on April 30, managed by entities such as China Asset Management (ChinaAMC), Harvest Global, and Bosera/HashKey. However, these new ETFs have seen minimal capital inflows compared to their U.S. counterparts, which experienced $154 million in inflows into Bitcoin ETFs on a single day.
This initiative by the SFC contrasts with the stance of the U.S. Securities and Exchange Commission (SEC), which considers staking services to be an investment contract and potentially a violation of securities laws. The SEC’s strict position has led major financial institutions in the U.S. to exclude staking from their spot ETH ETF offerings, as seen in Fidelity’s removal of staking options in its latest regulatory filings. The SEC has actively pursued legal actions against major crypto firms for their staking products, alleging violations of federal securities laws.
In light of this regulatory uncertainty, several Ethereum ETF applicants, including Fidelity, BlackRock, Grayscale, Bitwise, VanEck, Franklin Templeton, Invesco Galaxy, and ARK 21Shares, have excluded staking from their fund plans. Some market participants argue that these funds may be less appealing to investors without staking.
The SEC is expected to announce its decision on the pending Ethereum ETF applications on May 23. Market sentiment turned positive this week after Bloomberg analyst Eric Balchunas raised the odds of approval to 75%, citing increasing political pressure on the financial regulator. The chances of approval on Polymarket have also risen to 65% from a low of 10%. Meanwhile, Coinbase is challenging the SEC’s stance on staking and published a “Petition for Rulemaking” on March 20, asserting that core staking is not a security since it does not involve an investment of money and the opportunity cost of staking is not an investment.
In 2024, Hong Kong emerged as a growing hub for crypto service providers due to several pro-crypto regulations. It became the first country to approve a spot ETH ETF before the United States. However, the response since its launch last month has been lukewarm. Allowing staking could potentially attract a new influx of investment into the country’s ETFs, enhancing their appeal and supporting Hong Kong’s goal of becoming a global crypto hub.
