Regulators Redefine Crypto Markets With In-Kind ETP Mechanism

The U.S. Securities and Exchange Commission (SEC) has taken a significant step in modernizing its regulatory approach to crypto asset markets by approving in-kind creation and redemption mechanisms for exchange-traded products (ETPs) linked to cryptocurrencies such as bitcoin and ether. This decision marks a departure from previously cash-based redemption models and aligns with the regulatory treatment of commodity-based ETPs, according to SEC Chairman Paul S. Atkins. The move is expected to enhance market efficiency and reduce costs for investors and issuers in the crypto asset space.

Chairman Atkins emphasized that the approval is part of a broader effort to establish a “fit-for-purpose” regulatory framework for crypto markets. By enabling in-kind creation and redemption, the SEC aims to make these products more cost-effective and operationally efficient, which in turn could lead to a deeper and more dynamic market for crypto-based investments. The decision also supports greater liquidity and reduces arbitrage opportunities, contributing to market stability.

The SEC’s decision was accompanied by the approval of several related orders, including the listing of ETPs that hold both bitcoin and ether. This reflects the Commission’s commitment to a merit-neutral approach toward crypto-based products, ensuring that market participants have access to a diverse range of investment vehicles. The Commission also approved increased position limits for options on certain BTC ETPs and allowed the listing of flexible options on BTC-based ETPs, which could enhance investor flexibility and product utility.

Analysts note that the in-kind creation mechanism is expected to lower operational frictions for ETP providers and reduce basis spreads between the ETPs and their underlying crypto assets. These benefits are consistent with how similar mechanisms function for traditional commodity ETPs, such as those linked to gold or crude oil. The Commission’s decision to extend this model to crypto ETPs signals a regulatory shift toward treating crypto assets more similarly to traditional commodities, potentially fostering broader institutional adoption.

The decision has also been praised by the Division of Trading and Markets for its potential to enhance market efficiency and reduce transaction costs for all participants. Jamie Selway, Director of the Division, highlighted that the approval supports a more flexible and cost-effective ecosystem for ETPs, which could attract more retail and institutional investors into the crypto asset class. The SEC has also scheduled further discussions on two additional large-cap crypto ETP proposals, inviting public comments in support or opposition.

Overall, the SEC’s actions reflect its evolving stance toward crypto markets, balancing innovation with investor protection. While challenges remain in addressing risks such as market manipulation and fraud, the Commission’s recent steps indicate a willingness to adapt its regulatory tools to the realities of on-chain markets. As the crypto industry continues to mature, the SEC’s regulatory approach could set a precedent for how global regulators engage with digital assets in the years ahead.