SEC Proposes Spot Crypto ETFs: A Game Changer for BTC and ETH

The U.S. Securities and Exchange Commission (SEC) is seeking public comments on a proposal that would allow Bitcoin (BTC) and Ether (ETH) exchange-traded funds (ETFs) to create and redeem shares using spot cryptocurrency instead of cash. This move, outlined in a Feb. 10 filing, could improve the funds' after-tax performance and further promote institutional adoption of BTC and ETH.

On Feb. 5, Cboe BZX Exchange, a securities exchange, filed an amended application to permit so-called "in-kind" creations and redemptions for two ETFs: ARK 21Shares Bitcoin ETF (ARKB) and the 21Shares Core Ethereum ETF (CETH). Authorized traders create new ETF shares by exchanging either cash or a basket of the ETF's underlying assets for a "block" of typically several thousand shares. Redemptions reverse this process.

In-kind creations and redemptions, where an ETF swaps shares for a basket of underlying assets, are more tax-efficient and, therefore, preferred by most ETF issuers and investors. The SEC has not yet permitted in-kind redemptions for spot cryptocurrency ETFs.

In January, Nasdaq, another U.S. securities exchange, sought the SEC's permission to facilitate in-kind creations and redemptions for BlackRock's iShares Bitcoin Trust (IBIT), the largest ETF by net assets. BlackRock's website indicates that the ETF has assets under management (AUM) of approximately $57 billion, compared to ARKB and CETH's AUMs of around $5 billion and $20 million, respectively, according to 21Shares' website.

U.S. regulators are expected to soften their stance on crypto oversight, following the election of Donald Trump, who has pledged to make the U.S. the "world's crypto capital." In 2024, asset managers submitted a flurry of regulatory filings to list ETFs holding altcoins, including SOL (SOL), XRP (XRP), and Litecoin (LTC), among others. Issuers are also awaiting approval for several planned crypto index ETFs designed to hold diverse baskets of digital tokens.

Bloomberg Intelligence