The Plumbing Phase: How the SEC is Quietly Building the Institutional Superhighway for Crypto

From the lens of 7 years in this industry, you learn that the most important market shifts don’t happen with a parabolic price chart; they happen with a quiet rule change in a dense regulatory filing. While the market chases narratives, the real alpha is in understanding the plumbing. And right now, the most sophisticated financial plumbers in the world are hard at work, building an institutional superhighway directly into the heart of crypto.

The recent series of announcements from the U.S. Securities and Exchange Commission (SEC) are not isolated events. They are the coordinated components of a new, more mature regulatory framework. This is the “plumbing phase” of the cycle — the unglamorous but essential work of building the infrastructure that will support the next trillion dollars of capital inflow.

Three key developments signal this shift: the move to in-kind creations, the expansion of derivatives, and the standardization of listings.

The Game-Changer: “In-Kind” is the New Institutional On-Ramp

The single most important development is the SEC’s decision on July 29th to permit in-kind creations and redemptions for crypto Exchange Traded Products (ETPs).

To understand why this is a monumental shift, we must return to first principles. Until now, all spot crypto ETPs in the U.S. operated on a cash-create model. This meant that an Authorized Participant (AP) — like J.P. Morgan or Goldman Sachs — had to deliver cash to the ETP issuer (like BlackRock). The issuer would then go into the open market to buy Bitcoin or Ethereum.

This cash-create model was a clunky, inefficient, and expensive workaround. It introduced transaction costs, slippage on large orders, and significant tax inefficiencies, all of which were ultimately passed on to the end investor. It was a system designed with caution, not for capital efficiency.

The in-kind model changes everything. Now, an AP can deliver the actual underlying asset — real Bitcoin or Ethereum — directly to the issuer in exchange for ETP shares. This is how virtually all other commodity ETFs (like for gold) have always worked.

The implications are profound:

• Drastically Lower Costs: It eliminates the need for the issuer to constantly buy and sell crypto on the open market, reducing trading fees and market impact.
• Greater Tax Efficiency: The “in-kind” transfer is not a taxable event. This allows for more flexible tax planning and avoids passing on capital gains tax burdens to investors.
• Tighter Spreads & Better Pricing: By making the creation/redemption process more efficient, it allows market makers to keep the ETP’s price much closer to its net asset value (NAV).

This isn’t just a technical upgrade; it’s a signal. The SEC is now comfortable allowing the crypto ETP market to operate with the same sophisticated, efficient plumbing as the most mature markets in traditional finance.

The Second Order: Expanding the Derivatives Toolkit

Alongside the move to in-kind, the SEC has supercharged the crypto derivatives market. They approved new Flexible Exchange Options (FLEX), giving institutions the power to customize derivative contracts with specific strike prices and expiry dates.

More importantly, they increased the position limit on Bitcoin ETF options by a factor of ten — from 25,000 to 250,000 contracts.

This is not a minor tweak. It’s a declaration that the market is deep and liquid enough to handle institutional-scale hedging and speculation. Large funds that were previously constrained by position limits can now build the complex, large-scale positions they need to manage their portfolios. This unlocks a new level of sophisticated trading strategies and provides a crucial risk management tool that was previously unavailable.

The Final Piece: Standardizing the Listing Process

The plumbing upgrades extend all the way to the exchange level. Cboe, Nasdaq, and NYSE Arca have proposed a new, standardized listing process for commodity-based ETPs.

Under the old “one-coin-at-a-time” system, every new crypto ETP had to go through a lengthy, bespoke review process (up to 240 days). The proposed new framework would create a universal set of listing standards. If a new product (like a Solana ETP) meets these pre-approved standards, the listing process could be dramatically streamlined.

As Bloomberg analyst James Seyffart noted, the approval of in-kind for BTC and ETH has paved the way for this future. The SEC is moving from a world of one-off approvals to creating a scalable, repeatable framework for bringing new crypto assets to public markets.

A First-Principle Conclusion

When you assemble these pieces, the picture becomes clear. The SEC’s recent actions are a coordinated effort to industrialize the process of institutional investment in crypto.

• The In-Kind Model builds the efficient, low-cost on-ramp.
• The Expanded Derivatives Market provides the sophisticated risk management tools.
• The Standardized Listing Rules create the scalable highway for future products.

The era of regulatory defense and speculative fervor is giving way to a new cycle defined by regulatory clarity and value-based allocation. The market is transitioning from a world where we debate if institutions will come, to one where we simply analyze the efficiency of the pipes they are using to get here. The plumbing phase is on, and it’s laying the foundation for the next wave of adoption.

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The Plumbing Phase: How the SEC is Quietly Building the Institutional Superhighway for Crypto was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.