SEC’s In-Kind Approval May Enhance Bitcoin ETF Efficiency Primarily for Institutional Investors

• SEC’s new in-kind method allows authorized participants to swap ETF shares for actual crypto assets instead of cash.

• This change primarily benefits institutional investors, with retail investors seeing limited immediate impact.

• SEC Commissioner Hester Pierce and experts highlight the operational improvements and increased options limits for Bitcoin ETFs.

SEC approves in-kind crypto ETF creations to cut costs and boost efficiency. Learn how this impacts BTC and ETH ETFs. Stay informed with COINOTAG.

SEC Greenlights In-Kind Basis for Spot Crypto ETFs

On July 29, 2025, the U.S. Securities and Exchange Commission (SEC) authorized in-kind creations and redemptions for spot crypto exchange-traded products (ETPs). This new framework allows authorized participants (APs), mainly large institutions, to exchange shares of ETPs directly for the underlying cryptocurrencies, rather than cash. SEC Chair Paul Atkins described this as a “new day” for the agency, emphasizing that it will reduce operating costs and improve efficiency for these products.

How the In-Kind Method Changes ETF Operations

The in-kind process applies to all approved spot Bitcoin (BTC) and Ethereum (ETH) ETFs, enabling smoother asset transfers and better tax treatment. According to Bloomberg’s Senior ETF Analyst Eric Balchunas, this backend adjustment enhances operational efficiency but does not immediately extend redemption privileges to retail investors. For example, retail holders of BlackRock’s iShares Bitcoin Trust (IBIT) cannot yet redeem shares for physical BTC, although future ETF products may introduce this feature.

Source: Atkins/X

Why the In-Kind Basis Matters for Crypto ETFs

The in-kind mechanism significantly improves tax efficiency by allowing ETF shares to be exchanged for the underlying crypto assets without triggering taxable events. This reduces capital gains distributions and lowers fund expenses. SEC Commissioner Hester Pierce noted that ETF issuers have been advocating for this change since the approval of spot crypto ETFs last year. Additionally, the SEC approved a 10-fold increase in the options limit for BlackRock’s IBIT ETF, raising it from 25,000 to 250,000 contracts, which is expected to attract larger institutional participation and enhance liquidity during volatile market conditions.

Source: Balchunas/X

Source: Bloomberg

How Are ETH ETFs Performing Compared to BTC ETFs?

Despite Bitcoin ETFs dominating the market historically, recent data shows a notable shift. Ethereum (ETH) ETFs have experienced an 80% decline in inflows over the past week, yet their market share has grown from 13% to 20% in the last two months. Conversely, Bitcoin ETFs’ market share decreased from 90% to 82% during the same period. This trend reflects renewed investor interest in ETH amid developments in tokenization and stablecoin ecosystems. However, experts like Eric Balchunas predict ETH ETFs’ market share growth will likely plateau around 20%.

Source: Bloomberg

What Are the Benefits of In-Kind ETF Redemptions?

In-kind redemptions reduce the need for ETFs to sell assets to meet redemption requests, which helps avoid triggering capital gains taxes. This process lowers fund expenses and improves tax efficiency for investors. Institutional investors benefit most, as they can exchange large blocks of ETF shares for the underlying crypto assets directly, enhancing liquidity and operational efficiency.

How Does This Affect Retail Investors?

Currently, retail investors cannot redeem ETF shares for physical cryptocurrencies. The in-kind mechanism primarily serves institutional participants, but future ETF products may extend these benefits to retail holders. This change is expected to gradually improve overall market efficiency and reduce costs for all investors over time.

Frequently Asked Questions

What does the SEC’s in-kind approval mean for crypto ETFs?

This approval allows authorized participants to exchange ETF shares for underlying crypto assets directly, reducing costs and improving tax efficiency for institutional investors.

Why is the in-kind method important for ETF investors?

The in-kind method minimizes taxable events during share redemptions, lowering fund expenses and enhancing liquidity, mainly benefiting large institutional investors.

Will retail investors benefit from in-kind redemptions soon?

Currently, retail investors cannot redeem ETF shares for physical crypto, but future ETF products may introduce this feature, improving access and efficiency over time.

Key Takeaways

• SEC approval of in-kind creations enhances crypto ETF tax efficiency: Authorized participants can now exchange shares for underlying assets, reducing costs.
• Benefits primarily target institutional investors: Retail investors currently have limited access to in-kind redemptions.
• Market dynamics show ETH ETFs gaining share: ETH ETFs’ market share rose to 20%, while BTC ETFs declined slightly, reflecting shifting investor interest.

Conclusion

The SEC’s approval of in-kind basis for crypto ETFs marks a significant step toward improving operational efficiency and tax treatment, primarily benefiting institutional investors. While retail investors await similar access, this development signals growing maturity in crypto financial products. As Ethereum ETFs gain momentum alongside Bitcoin, the evolving ETF landscape promises enhanced options and efficiency for all market participants. Stay updated with COINOTAG for the latest crypto ETF insights.