SEC Reviews In-Kind Redemptions for Crypto ETFs

The U.S. Securities and Exchange Commission (SEC) is currently reviewing proposals for in-kind redemptions in cryptocurrency exchange-traded funds (ETFs). This shift from the current cash-based system could significantly enhance efficiency and reduce costs for ETF issuers and investors alike. In-kind redemptions would allow investors to redeem their ETF shares for the underlying crypto assets directly, rather than selling for cash. This mechanism is seen as a potential game-changer for institutional adoption and market efficiency.

Commissioner Hester Peirce of the SEC has hinted that in-kind redemptions for crypto ETFs are on the horizon. She explained that this model would enable ETF issuers to deliver and redeem fund shares using crypto assets directly, which could allow investors to withdraw Bitcoin from an ETF to a private wallet. This approach is expected to increase trading efficiency for funds and provide more flexibility for asset managers.

The SEC's stance on Bitcoin ETFs has been evolving. In December 2023, the SEC met with all spot Bitcoin ETF issuers and asked them to remove any reference to “in-kind” redemptions from their filings, focusing solely on “cash creates.” However, Peirce hinted in December 2024 that in-kind redemptions may be coming to Bitcoin spot ETFs in 2025. Currently, most spot crypto ETFs operate using cash-based creation and redemption processes, which limit efficiency for traditional crypto participants.

The SEC has been actively seeking comments on the proposal to allow in-kind redemptions. In February, the agency announced that it was soliciting public comments to evaluate whether these changes aligned with the Securities Exchange Act of 1934. In May, the SEC launched proceedings to assess Nasdaq’s proposed rule change allowing in-kind creations and redemptions for BlackRock’s Bitcoin ETF. Nasdaq filed the proposed rule change on January 24, 2025, and it was published in the Federal Register on February 12, triggering an initial review period. The SEC extended its decision deadline to May 13, formally instituting proceedings under Section 19(b)(2)(B) of the Securities Exchange Act of 1934.

In January, Cboe and VanEck also filed for in-kind creations and redemptions for their spot Bitcoin ETFs. In April, a BlackRock delegation met with the SEC’s Crypto Task Force to discuss the potential of allowing future in-kind redemptions and creations for crypto ETFs. The industry is eagerly awaiting the outcome of these reviews, as in-kind redemptions could revolutionize the way crypto ETFs operate, making them more efficient and cost-effective for both issuers and investors.

Financial experts predict a potential rise in ETF efficiency and cost reduction if in-kind mechanisms receive approval. This ongoing regulatory review by the SEC signifies a significant evolution in embracing digital assets within the traditional financial system. The move to in-kind redemptions is supported by substantial interest from both industry leaders and digital asset investors. This shift represents a broader acceptance of cryptocurrency within regulated financial structures and could pave the way for further innovations in crypto ETFs.