SEC Approves In-Kind Redemption for Crypto ETFs, Enhancing Market Efficiency

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."

I'm pleased to share the SEC approved in-kind creations and redemptions for crypto ETPs. The approvals continue to build a rational regulatory framework for crypto, leading to a deeper and more dynamic market, which will benefit all American investors.

— Paul Atkins (@SECPaulSAtkins) July 29, 2025

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. Applying the same mechanism to crypto ETPs reduces friction and 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. Analysts say the shift brings the sector closer to how mainstream ETFs operate, potentially leading 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.

Frequently Asked Questions (FAQ)

What are in-kind creations and redemptions for crypto ETFs? In-kind creations and redemptions allow authorized participants to exchange ETF shares directly for the underlying cryptocurrency assets, rather than through cash transactions. This is a common practice for traditional ETFs. How does the in-kind model benefit investors? It offers better tax efficiency by allowing investors to receive the actual cryptocurrency instead of cash, deferring capital gains taxes until they choose to sell the assets. This also generally leads to more efficient fund management. What was the previous system for crypto ETFs in the US? Previously, spot Bitcoin and Ether ETPs in the US were restricted to cash-only creations and redemptions. What is the impact of this SEC approval on the crypto market? The approval is expected to enhance market efficiency and reduce costs for crypto ETFs. It brings the crypto ETF structure closer to that of traditional ETFs, potentially improving liquidity and attracting more institutional investors. Which cryptocurrencies are currently involved in this new redemption model? The SEC's approval specifically mentions Bitcoin and Ether ETPs.

Crypto Market AI's Take

This significant regulatory development by the SEC regarding in-kind redemptions for crypto ETFs represents a crucial step towards greater market efficiency and accessibility within the digital asset space. By aligning crypto ETPs with the operational mechanisms of traditional ETFs, the move is set to reduce costs and increase flexibility for both issuers and investors. At Crypto Market AI, we are continuously developing advanced AI-driven tools and insights to navigate these evolving market dynamics. Our AI trading bots and market analysis platforms are designed to leverage such regulatory shifts, providing users with a competitive edge. You can explore our AI trading bots to see how artificial intelligence is enhancing trading strategies. Additionally, our in-depth market analysis provides timely insights into these regulatory impacts and their potential consequences for asset prices.

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