SEC Aligns Crypto ETPs with Traditional Markets, Unlocking Institutional Capital

The U.S. Securities and Exchange Commission (SEC) has taken a significant step toward streamlining crypto-based investment vehicles, approving in-kind creation and redemption mechanisms for exchange-traded products (ETPs) tracking Bitcoin and Ethereum. The decision, announced on July 29, aligns crypto ETPs with traditional commodity and equity ETPs, allowing authorized participants to exchange shares directly for the underlying cryptocurrencies instead of cash. SEC Chairman Paul S. Atkins emphasized that the move would make these products “less costly and more efficient,” fostering a “deeper and more dynamic market” for investors . This regulatory shift follows years of cash-only restrictions imposed on crypto ETPs, which analysts argue created inefficiencies and limited institutional participation .

The approval extends beyond redemptions, with the SEC also raising position limits for Bitcoin ETF options from 25,000 to 250,000 contracts and introducing customizable “FLEX options.” These changes aim to boost liquidity and accommodate sophisticated institutional strategies, such as hedging and leveraged trading . Bloomberg ETF analyst Eric Balchunas noted that the dual-barreled approval could catalyze a “new wave of capital” into the $150 billion crypto ETF market, particularly as BlackRock’s iShares Ethereum ETF and other major funds adapt to the new framework . The adjustments also align with broader policy reforms, including the Trump administration’s August 7 executive order to expand access to alternative assets in 401(k) plans, potentially accelerating institutional adoption .

Market participants have welcomed the shift, with industry leaders highlighting its tax efficiency and operational benefits. In-kind redemptions allow investors to defer capital gains until they sell the underlying crypto assets, reducing tax liabilities for institutional holders. Jamie Selway, director of the SEC’s Division of Trading and Markets, stated that the mechanism “provides flexibility and cost savings to ETP issuers, authorized participants, and investors,” enhancing overall market efficiency . This is particularly significant for spot Bitcoin and Ethereum ETFs, which now hold over 1.298 million BTC and $152.1 billion in assets, according to Bitbo data .

The regulatory momentum reflects a broader trend of easing crypto restrictions. Earlier in 2025, the SEC approved a mixed spot Bitcoin-Ethereum ETP and permitted exchanges to list options on these products. These developments follow the agency’s withdrawal of 2022 supervisory guidance that had constrained bank-affiliated broker-dealers from participating in crypto activities, further leveling the playing field . Analysts suggest the changes signal a “fit-for-purpose regulatory framework” for crypto markets, as envisioned by Chairman Atkins, and could pave the way for standardized listing requirements by October .

While the focus remains on ETPs and ETFs, analysts predict that Q4 returns could be driven by the combination of regulatory clarity, stablecoin integration, and the proliferation of new crypto products. James Seyffart of Bloomberg noted a 90–95% likelihood of approvals for spot ETFs tied to tokens like XRP, Solana, and Cardano before year-end, citing the SEC’s growing comfort with crypto innovation SEC Pauses Bitwise Crypto ETF After Approval; What’s Behind the Shock Decision?^[3]. Meanwhile, stablecoin-related legislation, though not detailed in the provided content, is expected to address market structure and custody concerns, further supporting institutional inflows .

The market’s response has been positive, with Bitcoin and Ethereum ETFs recording sustained inflows. BlackRock’s iShares Ethereum ETF, for instance, reached $10 billion in assets within 251 days, the third-fastest fund to hit that milestone. As the SEC continues to refine its approach, the sector’s trajectory appears increasingly aligned with traditional finance, potentially unlocking new capital and liquidity for Q4.