BlackRock Proposes In-Kind Redemptions for Bitcoin ETF

The U.S. Securities and Exchange Commission (SEC) is reviewing a proposal from BlackRock to allow in-kind redemptions for its spot Bitcoin ETF. The regulatory agency acknowledged the proposal in a Thursday filing, inviting public comments within 21 days of its publication in the Federal Register.

BlackRock's proposal aims to cut costs and boost liquidity by allowing authorized participants (APs) to receive Bitcoin directly rather than cash during redemptions. This change would not apply to retail investors, as only APs—typically large financial institutions—would be allowed to redeem shares in Bitcoin.

If approved, in-kind redemptions could provide advantages for institutional investors by reducing transaction costs and improving market liquidity. Shifting from cash-based redemptions to in-kind transactions could also help avoid forced Bitcoin sales, which might reduce downward price pressure on the asset. This process would make Bitcoin ETFs function more like traditional commodity ETFs, such as those for gold.

The SEC's decision to consider in-kind redemptions marks a shift from its earlier position. When the agency initially approved spot Bitcoin ETFs, it favored a cash model due to concerns about market manipulation and volatility. However, with growing institutional interest in Bitcoin ETFs, the regulatory stance appears to be evolving.

BlackRock's request comes amid broader changes in the crypto investment landscape. In August 2023, Grayscale Investments won a lawsuit against the SEC, forcing the regulator to review its rejection of Grayscale's attempt to convert its Bitcoin Trust into a spot ETF. This legal victory contributed to the eventual approval of multiple spot Bitcoin ETFs in January 2024.

Meanwhile, the SEC's engagement with new crypto ETF structures signals ongoing developments in digital asset regulation. The approval of spot Bitcoin ETFs has paved the way for additional crypto-related investment vehicles, with Litecoin now being considered a potential second-mover in the altcoin ETF space. Market participants are watching whether in-kind redemption models gain regulatory approval, which could influence the long-term operation of spot Bitcoin ETFs.