Fidelity Introduces In-Kind ETF Creation to Align with Global Standards

Fidelity Investments has submitted regulatory amendments to enable in-kind creation and redemption mechanisms for its cryptocurrency exchange-traded funds (ETFs), marking a strategic shift from the prior cash-only model mandated by the U.S. Securities and Exchange Commission (SEC) [1]. The move, announced on July 22, 2025, aligns with broader industry efforts to modernize U.S. ETF structures and harmonize them with international standards. The changes, endorsed by other major ETF issuers, aim to enhance operational efficiency for institutional investors by allowing them to transact ETF shares using Bitcoin or Ethereum instead of cash [1].

The regulatory adjustment reflects a significant evolution in the U.S. crypto market. Historically, the cash-only model restricted institutional participants to using cash to create or redeem ETF shares, which could exacerbate premium/discount gaps and limit liquidity. By introducing in-kind mechanisms, Fidelity seeks to mitigate these inefficiencies and foster deeper market participation. According to James Seyffart, an ETF analyst at Bloomberg Intelligence, “This indicates positive movement and likely fine-tuning happening with the SEC” [1]. The shift is particularly relevant for institutional investors, as it reduces transaction costs and aligns with global practices where in-kind creation models are standard in traditional asset classes.

Fidelity’s leadership, under Abigail Johnson, has positioned the firm at the forefront of regulatory innovation in crypto markets. The firm’s advocacy for in-kind mechanisms underscores its broader strategy to bridge regulatory gaps between U.S. and international markets. For instance, global ETF frameworks have long permitted in-kind transactions, enabling smoother arbitrage and improved price discovery. By replicating these practices domestically, Fidelity may encourage greater institutional adoption of crypto ETFs and narrow the liquidity premium gaps observed in U.S. markets [1].

The implications of this change extend beyond operational efficiency. In-kind creation and redemption mechanisms could attract larger institutional allocations by reducing the friction associated with cash-based transactions. For example, institutional investors can now directly exchange their crypto holdings for ETF shares without liquidating assets into cash, a process that often incurs additional costs and slippage. This model also aligns with the structural norms of traditional ETF markets, where in-kind mechanisms are a cornerstone of liquidity management.

Critically, the amendments do not alter the experience for retail investors, who will continue to interact with the ETFs through standard cash-based transactions. However, the ripple effects on market dynamics could be substantial. Historical trends suggest that in-kind mechanisms in international markets have supported tighter bid-ask spreads and more efficient price discovery. If similar outcomes materialize in the U.S., it could further legitimize crypto ETFs as institutional-grade instruments, potentially expanding their appeal to a broader investor base.

The SEC’s endorsement of the amendment signals a pragmatic approach to regulating crypto assets, albeit within existing legal frameworks. By permitting in-kind creation and redemption, the regulator appears to acknowledge the maturation of crypto markets and their growing alignment with traditional asset classes. This development also highlights the SEC’s role in balancing innovation with investor protection, as it navigates the complexities of emerging financial technologies.

Source: [1] [Fidelity Pushes for In-Kind Creations in Crypto ETFs] [https://theccpress.com/fidelity-etf-amendment-in-kind-transactions/]