Bitcoin ETFs May Soon Enable In-Kind Creations and Redemptions, Primarily Benefiting Institutional Investors

• Major crypto ETF providers are advancing filings for in-kind creations and redemptions, marking a significant step toward more efficient Bitcoin and Ethereum ETF operations.

• This shift could enable ETFs to process redemptions using actual crypto assets, aligning their structure more closely with traditional exchange-traded products (ETPs).

• According to COINOTAG sources, while institutional investors stand to benefit immediately, retail investors may face limited access as Wall Street firms dominate the in-kind redemption process.

Crypto ETFs move closer to in-kind creations and redemptions, promising efficiency gains for Bitcoin and Ethereum funds while retail investors remain sidelined.

Wall Street Set to Benefit as SEC Inches Closer to In-Kind Crypto ETF Approval

Recent amendments filed by leading ETF providers such as Ark 21Shares, Fidelity, Invesco Galaxy, VanEck, and WisdomTree indicate a concerted push toward enabling in-kind creations and redemptions for Bitcoin and Ethereum ETFs. This transition would allow authorized participants to exchange actual BTC or ETH for ETF shares, replacing the current cash-based model where investors provide cash and the issuer subsequently purchases the underlying crypto.

ETF analyst James Seyffart of Bloomberg highlights this development as a positive signal of progress in regulatory discussions. He notes, “More positive signs regarding Bitcoin & Ethereum ETFs obtaining the ability to do in-kind creation and redemption. Five different funds on CBOE filed amendments with the SEC. This indicates to me that there is positive movement and likely fine tuning happening with the SEC.”

Approval of these amendments would bring crypto ETFs in line with traditional ETP structures, enhancing operational efficiency and potentially increasing institutional participation. The move reflects a broader industry trend, with regions like Hong Kong already permitting in-kind creations and redemptions for spot Bitcoin ETFs, potentially giving them a competitive edge in attracting assets under management and trading volume.

Initially, the SEC mandated cash redemptions for crypto ETFs, a compromise that prioritized regulatory approval over operational preferences. ETF analyst Eric Balchunas explained the rationale: “Cash creates makes sense IMO because broker dealers can’t deal in Bitcoin so doing cash creates puts onus on issuers to transact in Bitcoin and keeps broker dealers from having to use unregistered subsidiaries or third-party firms to deal w the BTC. Less limitations for them overall.”

Why the SEC went for cash-creates

The SEC’s preference for cash-based redemptions stemmed primarily from concerns over money laundering risks. By restricting direct crypto transfers to issuers, the SEC aimed to minimize the involvement of intermediaries such as unregistered broker-dealers, thereby enhancing regulatory oversight.

Charles Gasparino, senior correspondent at Fox Business News, elaborated: “SEC worried about ETFs being used as a vehicle for money laundering.” This approach also centralized Bitcoin trading activities with issuers, as brokers remain barred from directly trading spot Bitcoin ETFs.

Retail Locked Out with In-Kind Crypto ETF Access Limited to Wall Street Firms

Despite the promising regulatory progress, retail investors are unlikely to benefit immediately from in-kind creation and redemption capabilities. The process is expected to be accessible primarily to authorized participants—large institutional players and market makers—who have the infrastructure to handle direct crypto exchanges.

As one market participant noted, “Would this imply retail have a way to redeem in kind? Guessing brokers would have to support the physical.” However, ETF analyst James Seyffart cautions that retail investors should temper expectations: “The vast majority of people won’t even see a difference because the products on the market now already trade extremely efficiently. This will treat crypto ETPs the same as other ETPs are treated.”

While in-kind redemptions could enhance liquidity and operational efficiency at the institutional level, retail investors will continue to access crypto ETFs through traditional brokerage platforms without direct crypto redemption capabilities.

Seyffart also points out that similar in-kind redemption mechanisms have long existed for commodity ETFs, such as gold, suggesting that this development is a natural evolution for crypto ETFs but one that will take time to permeate the broader market.

Conclusion

The recent filings for in-kind creation and redemption amendments by major crypto ETF providers represent a pivotal advancement toward aligning Bitcoin and Ethereum ETFs with traditional ETP frameworks. While this evolution promises increased efficiency and institutional engagement, retail investors are expected to remain on the sidelines in the near term, as access to in-kind mechanisms will be limited to authorized participants. Nonetheless, these regulatory developments lay important groundwork for the future expansion and maturation of crypto ETFs, potentially paving the way for broader market participation over time.