SEC Commissioner Hester Peirce Signals Potential Shift to In-Kind Redemptions for Crypto ETFs

U.S. Securities and Exchange Commission (SEC) Commissioner Hester Peirce has indicated that in-kind redemptions for cryptocurrency exchange-traded funds (ETFs) could be on the horizon. This development is seen as a sign of the SEC's growing openness to evolving the structure of crypto investment products. Peirce's remarks suggest that the SEC may soon approve the creation and redemption of spot-based crypto ETFs, which would allow for a more traditional ETF structure.

The SEC initially approved cash-only models for spot Bitcoin ETFs in early 2024, but the industry has been advocating for a shift to in-kind redemptions. This mechanism would enable the direct exchange of ETF shares for the underlying cryptocurrency, providing a more efficient and cost-effective way to manage ETFs. Peirce's comments have been interpreted as a positive step towards this transition, indicating that the SEC is considering the benefits of in-kind redemptions for both investors and the market as a whole.

During a panel discussion held on Wednesday at the Bitcoin Policy Research Institute, Republican Commissioner Peirce was asked whether the SEC would approve the in-kind creation and redemption mechanism for ETFs and whether this was "soon to be the case." Several companies, including BlackRock, have been urging the SEC for months to allow Bitcoin ETFs to utilize an in-kind creation and redemption process rather than relying on cash. In January of this year, Nasdaq on behalf of BlackRock submitted a 19b-4 form to apply for this change, and subsequently, other institutions have also submitted similar applications. Hester Peirce responded, stating, "These forms are currently in the review process. So I do think this is something that will come to fruition at some point. I can't predict the outcome, but we have definitely heard a lot of interest in this."

The potential approval of in-kind redemptions for crypto ETFs comes at a time when there is significant interest in the crypto market. The SEC is scheduled to rule on several proposals to convert existing crypto funds into ETFs, including Grayscale Investments’ Digital Large Cap Fund (GDLC) and Bitwise's BITW crypto index fund. These conversions would allow investors to gain exposure to a basket of tokens, rather than just a single cryptocurrency. The SEC's decision on these proposals could catalyze the next wave of crypto fund launches, providing investors with more diverse investment options.

The SEC's consideration of in-kind redemptions for crypto ETFs is part of a broader effort to develop a comprehensive regulatory framework for the crypto market. Commissioner Peirce has urged patience regarding crypto-related progress, noting the need for efficient and comprehensive rule-making. She has highlighted the importance of developing generic listing standards for crypto ETFs, which would provide a clear and consistent framework for the approval of new products.

The potential approval of in-kind redemptions for crypto ETFs is a significant development for the crypto market. It would provide investors with a more efficient and cost-effective way to gain exposure to cryptocurrencies, while also providing the SEC with a more comprehensive regulatory framework for the approval of new products. As the SEC continues to consider the benefits of in-kind redemptions, investors and industry participants will be closely watching for any further developments.