SEC Opens Door to In-Kind Redemption Option for Crypto ETFs

The US Securities and Exchange Commission (SEC) has cleared the way for crypto ETFs to use in-kind creations and redemptions, a move industry participants say could make the fast-growing market more efficient and cost-effective.

The regulator voted on July 29 to approve orders allowing authorized participants to create and redeem shares of Bitcoin and Ether exchange-traded products (ETPs) in kind, meaning they can receive the underlying cryptocurrency directly rather than cash.

Until now, spot Bitcoin and Ether ETPs approved in 2024 were restricted to cash-only transactions.

Chairman Paul S. Atkins said following the vote: “A key priority of my chairmanship is developing a fit-for-purpose regulatory framework for crypto asset markets. Investors will benefit from these approvals, as they will make these products less costly and more efficient.”

New Redemption Option to Boost Flexibility and Cut Costs

The in-kind redemption model is common for traditional stock and commodity ETFs. In this system, authorized participants exchange shares for the underlying securities rather than cash.

Now, applying the same mechanism to crypto ETPs, industry observers say, reduces friction. Additionally, it gives issuers and market makers greater flexibility when managing the funds.

Move Lets Investors Defer Capital Gains Until Crypto Sale

By allowing in-kind transfers, the SEC also gives institutional investors better tax efficiency. In a cash redemption, ETP issuers must sell the underlying cryptocurrency to raise funds, often triggering capital gains that are then passed on to shareholders.

In-kind redemptions allow investors to receive the crypto directly and defer taxes until they decide to sell the assets.

The Commission’s vote also advanced other initiatives to standardize the treatment of crypto-based products. It approved exchange applications to list and trade a mixed spot Bitcoin and Ether ETP, as well as options and Flexible Exchange (FLEX) options on certain spot Bitcoin products. Position limits for options on Bitcoin ETPs were increased to align with generic limits of up to 250,000 contracts.

ETP Issuers Poised to Benefit as SEC Eases Operational Constraints

Two scheduling orders were also issued to seek public comment on whether national securities exchanges should be allowed to list and trade two large-cap crypto ETPs. These products had been approved earlier by the Division of Trading and Markets under delegated authority.

The decision marks a departure from the more restrictive framework adopted for crypto ETFs last year. In addition, analysts said the shift brings the sector closer to how mainstream ETFs operate. As a result, it could lead to tighter spreads and better liquidity. Moreover, it may attract new institutional investors who had been cautious about the operational constraints of cash-only redemptions.

Crypto ETF assets have grown rapidly since spot Bitcoin ETFs debuted in early 2024, amassing tens of billions in assets under management. The SEC’s latest orders could accelerate that growth as issuers adapt to the new framework.