The Securities and Exchange Commission (SEC) has voted to approve orders permitting in-kind creations and redemptions for crypto asset exchange-traded product (ETP) shares. This decision marks a shift from the previously approved spot Bitcoin and Ether ETPs, which were restricted to in-cash transactions. The approval allows Bitcoin and Ether ETPs to operate similarly to other commodity-based ETPs, facilitating share creation and redemption using the underlying assets.
SEC Chairman Paul S. Atkins stated that this decision reflects a commitment to developing a suitable regulatory framework for crypto asset markets. He believes investors will benefit from the increased efficiency and reduced costs associated with in-kind redemptions. According to Atkins, these approvals build a rational regulatory framework for crypto, fostering a more dynamic market that benefits all American investors.
Jamie Selway, Director of the Division of Trading and Markets, emphasized that the SEC's decision is an important advancement for the growing crypto-based ETP market. In-kind creation and redemption offer greater flexibility and cost savings for ETP issuers, authorized participants, and investors, contributing to a more efficient market.
Prior to this approval, crypto asset ETPs were unable to use in-kind creations and redemptions, unlike other commodity ETPs, which led to unnecessary costs and burdens. The previous cash-only redemption structure required authorized participants to redeem ETP shares for U.S. dollars, forcing the ETP issuer to buy or sell the crypto asset on the open market. This process introduced significant transaction costs and exposed the product and its investors to price slippage in the underlying asset class, making the ETP more expensive. The SEC's earlier order in January 2024, which initially approved rules for listing spot crypto ETPs, was criticized for not adequately justifying the difference in structure compared to other commodity ETPs.
The new order aims to align crypto asset ETPs with standard practices for similar products, giving investors access to products they have long desired. By eliminating the market asymmetries and inefficiencies created by cash-only redemption, in-kind redemptions will enable crypto-asset ETPs to manage exposure more cheaply and transparently. This aligns with how asset managers and investors utilize ETPs in other markets.
In addition to approving in-kind redemptions, the SEC also approved other orders that promote a merit-neutral approach to crypto-based products. These include exchange applications seeking to list and trade an ETP holding mixed spot Bitcoin and spot Ether, options on certain spot Bitcoin ETPs, Flexible Exchange (FLEX) options on shares of certain BTC-based ETPs, and an increase in position limits. The SEC subsequently granted "accelerated approvals" to Nasdaq Stock Market LLC, NYSE Arca, Inc., and Cboe BZX Exchange to allow in-kind creations and redemptions for several ETFs, including those from BlackRock, Ark21, Fidelity, VanEck, and Franklin Templeton.
Bloomberg ETF analysts have also commented on the SEC's recent decision. Eric Balchunas noted that the SEC's order signals a broader wave of ETF approvals and anticipates more greenlights by early fall. James Seyffart added that future altcoin ETFs will likely allow in-kind creation and redemption from the start, calling it continued movement in the right direction. Furthermore, the SEC issued new scheduling orders for upcoming large-cap crypto ETF proposals.
