Crypto ETFs Get Boost as SEC Greenlights In‑Kind Redemptions

At their launch in early 2024, U.S. spot Bitcoin (and later Ethereum) ETFs were approved on the condition that all creations and redemptions be conducted in cash. Authorized participants (APs) had to deposit cash to create new ETF shares, prompting issuers to purchase BTC or ETH in the open market, and during redemptions, ETFs sold crypto assets and returned cash to APs. This cash-only model introduced added transaction costs, potential tax events, and operational inefficiencies compared to the in-kind mechanism common in commodity-based ETFs.

With the SEC’s new order, APs may now settle directly in crypto assets, transferring Bitcoin or Ethereum in exchange for ETF shares or vice versa. This in-kind mechanism is standard in traditional commodity ETFs and can significantly reduce transaction costs, tracking errors, and capital gains tax events.

In recent weeks, issuers including ARK 21Shares, Fidelity, Invesco Galaxy, VanEck, and WisdomTree filed nearly identical amendments seeking the in-kind capability for both Bitcoin and Ethereum ETFs. These filings, submitted mostly on July 22, signaled coordination and possible regulatory appetite for the change. Bloomberg ETF analyst James Seyffart described them as “positive signs” and a likely indication of progress with the SEC.

Previously, the SEC delayed decisions on several issuer applications, including those from WisdomTree and VanEck, pushing deadlines into June, citing operational and fraud concerns. Commissioner Hester Peirce had hinted earlier this year that in-kind redemptions were “on the horizon.”

Alongside in-kind approval, the SEC is considering a series of related structural changes. Nasdaq ISE has submitted a filing to raise position and exercise limits on Bitcoin ETF options from 25,000 to 250,000 contracts, aimed at deeper liquidity and hedging flexibility, though it remains under SEC review. The regulator has also accepted amendments to list mixed Bitcoin–Ethereum products and is processing proposed rule changes for Invesco Galaxy’s BTC and ETH ETFs on Cboe BZX to enable in‑kind mechanisms.

In-kind redemptions mainly benefit institutional investors and authorized participants, who can now avoid inefficient cash conversions and capital gains triggers. This leads to narrower bid-ask spreads, closer tracking of NAV, and faster settlement. While smaller retail investors may not see immediate advantages, improved liquidity and more accurate secondary market pricing are expected to follow.

In-kind redemptions can reduce the fund’s taxable events since assets aren’t sold for cash. Allowing transfers in BTC/ETH removes the need to execute underlying trades at scale. During volatile periods, cash‑based systems previously risked NAV divergence from market prices, now less likely. This change may attract greater institutional flows into crypto ETFs, reduce trading frictions, and potentially pave the way for broader acceptance of crypto-based ETFs.

Hong Kong has permitted in-kind redemptions for its spot crypto ETFs since early 2024, offering a more direct model for retail participants in Asia. Its regulatory framework has been cited repeatedly as more progressive relative to earlier U.S. cash-based models. In the U.S., broader skepticism prevailed under former Chair Gary Gensler, who had prioritized caution regarding crypto custody, market manipulation, and investor protections. SEC approvals for spot Ether ETFs in mid‑2024 represented a pivotal shift, but the cash-only requirement remained. Under Chair Atkins, the SEC appears to be embracing more alignment with international ETF standards.

With in-kind redemptions now authorized, issuers will implement operational changes and update prospectuses accordingly. Investors should watch for performance divergence and whether fund‑level tracking errors shrink, whether institutional entrants scale crypto ETF AUM, and whether new proposals for other asset-backed funds, such as Solana or Cardano, follow in-kind structures.

The SEC’s latest order marks a turning point for U.S. spot Bitcoin and Ethereum ETFs, enabling in-kind settlements brings them in line with global ETF norms, boosts operational and tax efficiencies, and supports deeper liquidity. Under Chair Paul Atkins, the agency is signaling a more accommodative and innovation-focused approach toward crypto market infrastructure.