The SEC has made a big move for the U.S. digital asset investment landscape.
The regulatory watchdog approved in-kind creation and redemption for all spot bitcoin and ethereum ETFs. This means authorized participants (typically big institutional investors and banks) can exchange ETF shares for bitcoin or ethereum instead of cash.
Long-awaited by issuers and market makers, this should make bitcoin ETFs more efficient, cheaper and bring them in line with traditional commodity ETFs like those backed by gold.
Before, when investors wanted to redeem their shares in a spot bitcoin ETF, the issuer had to convert the bitcoin into cash before fulfilling those redemptions. Now they can just hand over the actual assets – bitcoin in this case – making the process faster and cheaper.
This is known as “in-kind” redemption and is used in other asset classes, particularly commodities.
Related: Bitcoin ETFs | Discussions over Cash Redemption vs In-Kind Model
According to SEC Chairman Paul S. Atkins, “It’s a new day at the SEC. A key priority of my chairmanship is developing a fit-for-purpose regulatory framework for crypto asset markets. Investors will benefit from these approvals, as they will make these products less costly and more efficient.”
In-kind redemptions align bitcoin ETFs with the gold ETF model, which has been around for years. Industry experts argue bitcoin ETFs should be treated the same as physical commodity ETFs.
“In-kind creation and redemption provide flexibility and cost savings to ETP issuers, authorized participants, and investors,” said Jamie Selway, Director of the SEC’s Division of Trading and Markets. “Resulting in a more efficient market.”
It also removes a big operational hurdle. Under the old cash-only model, authorized participants had to buy or sell large amounts of bitcoin to match inflows and outflows, which added costs and sometimes introduced delays.
With in-kind transactions, they can handle the actual assets directly, reducing trading frictions and market impact.
Bloomberg analyst Eric Balchunas called it a big deal. “This is huge,” he tweeted. “And (it) will create an explosion of option-based Bitcoin ETFs.”
Balchunas and fellow Bloomberg analyst James Seyffart noted that this adds momentum to digital asset ETFs. Seyffart called it “more movement in the right direction.”
ETF industry veteran Nate Geraci, President of The ETF Store, pointed out the significance of the SEC’s evolving approach. Quoting Chairman Atkins, he said, “It’s a new day at the SEC,” and the agency is committed to creating a clear and fair regulatory path for digital assets.
The SEC didn’t stop at in-kind redemptions. They also approved a bunch of other changes that will help institutional participation:
- Increased Position Limits: The SEC increased the position limit for Bitcoin ETF options from 25,000 to 250,000 contracts, providing more flexibility for institutions to trade and hedge.
- New Options Products: They approved listed and FLEX options (customizable options contracts) on several bitcoin-based ETFs.
- Mixed Digital Asset ETFs: They approved new ETFs that combine bitcoin and ethereum into one fund.
This is the first big Bitcoin-friendly move from the SEC under Chairman Paul Atkins, who was appointed earlier this year. Atkins, a former commissioner known for his market-friendly stance, has promised to build a regulatory structure that supports innovation while protecting investors.
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