US SEC approves in-kind redemptions for crypto ETPs

In another bullish development for the crypto industry, the U.S. Securities and Exchange Commission has approved in-kind creation and redemption for all spot Bitcoin and Ethereum ETFs. But what does it mean?

On Tuesday, July 28, the SEC announced it had finalized orders allowing authorized participants to create and redeem shares of crypto exchange-traded products (ETPs) using the underlying digital assets—Bitcoin or Ethereum—instead of cash.

This applies to all approved spot Bitcoin and Ethereum ETFs, including those from major issuers like BlackRock, Fidelity, Ark Invest, and VanEck.

The approvals were granted through accelerated processes to major exchanges, including Nasdaq, NYSE Arca, and Cboe BZX. These exchanges have submitted filings requesting permission for in-kind transactions as an alternative to the previously mandated cash-only model. 

With the SEC’s go-ahead, these platforms can now offer more efficient ETF structures in line with standard industry practices used for non-crypto funds.

What is in-kind creation and redemption, and why does it matter?

In-kind creation and redemption is a process where authorized participants, typically institutional firms and market makers, exchange ETF shares directly for the underlying asset rather than cash. 

For crypto ETFs, that means receiving Bitcoin or Ethereum instead of fiat when redeeming shares, and depositing those assets to create new ones.

This model is seen as more operationally efficient as it reduces reliance on liquidating assets into cash, minimizes taxable events, and cuts down transaction costs. It also makes it easier to add or remove ETF shares based on demand, helping the fund’s price stay closer to the actual value of the crypto it holds.

Experts believe this could accelerate inflows into crypto ETFs, attract new institutional players, improve secondary market efficiency, and also improve tax efficiency by reducing capital gains distributions passed on to ETF holders.

Commenting on the development, Jamie Selway, Director of the SEC’s Division of Trading and Markets, said the policy change “provides flexibility and cost savings” to ETF issuers, market participants, and ultimately the broader market.

Experts like Bloomberg ETF analyst James Seyffart have long advocated for this change, arguing that in-kind redemptions make the ETF process more streamlined by reducing the number of steps and intermediaries involved.

What happens next?

With in-kind creation and redemption now approved, ETF issuers are expected to implement the updated mechanisms in the coming weeks. Exchanges that received accelerated approvals are preparing to facilitate the new structure. 

Analysts expect this policy change to pave the way for similar frameworks in pending ETF proposals tied to altcoins.

“The coming approvals for alt coin ETFs likely going to allow in-kind from the get go. More movement in right direction IMO,” Seyffart wrote in a Tuesday X post.

How did we get here?

The move represents a sharp departure from the SEC’s previous stance under former Chair Gary Gensler, who insisted on cash-only redemptions when the first spot Bitcoin ETFs were approved in January 2024. 

Things began to change earlier this year when Paul Atkins was appointed SEC Chair. A known market-friendly voice, Atkins quickly signaled support for a more “fit-for-purpose” regulatory approach to crypto.

“I am pleased the Commission approved these orders permitting in-kind creations and redemptions for a host of crypto asset ETPs. Investors will benefit from these approvals, as they will make these products less costly and more efficient,” Atkins said in a statement accompanying the latest announcement.

In coordination with SEC Commissioner Hester Peirce—referred to as “Crypto Mom” within the community for her pro-innovation stance—the Commission had begun reviewing proposals to enable in-kind mechanisms earlier this year.

Peirce also played a central role in shaping the new policy landscape. As head of the SEC’s newly established Crypto Task Force, she led efforts to repeal restrictive rules and push for practical reforms, including the expansion of in-kind redemption options.