tl;dr
Cboe has submitted amendments for five crypto-related ETFs allowing authorized participants to create and redeem shares in-kind, exchanging Bitcoin or Ethereum directly instead of cash. The SEC appears to be collaborating with issuers to finalize this in-kind framework. Only authorized participants,...
Cboe has submitted amendments for five crypto-related exchange-traded funds (ETFs) that would allow authorized participants to create and redeem shares in-kind, marking a positive development for the approval of such funds. Bloomberg ETF analyst James Seyffart revealed on July 22 that amended rule filings for issuers ARK 21Shares, VanEck, Fidelity, WisdomTree, and Invesco Galaxy indicate the Securities and Exchange Commission (SEC) is collaborating with issuers to finalize an in-kind framework rather than opposing it. Seyffart described this as fine-tuning, not stonewalling.
In-kind redemptions enable investors to exchange Bitcoin (BTC) or Ethereum (ETH) directly for the underlying assets instead of cash, receiving them upon redemption. However, Seyffart emphasized that retail investors would not be able to swap ETF shares for Bitcoin or Ethereum directly; only authorized participants like large Wall Street firms and market makers would manage these transfers. For most investors, existing spot Bitcoin ETFs already trade close to their net asset value, so no visible changes will occur on their screens.
The structural benefits of in-kind flows include enhancing tax efficiency and reducing friction within crypto exchange-traded products (ETPs). If approved by the SEC, authorized participants could transfer crypto directly instead of handling large cash positions during basket creation or redemption. This change could lower spreads and hedging costs, especially in volatile markets, while providing issuers with greater portfolio management flexibility. Although retail investors may not notice immediate effects, smoother primary-market mechanics typically improve secondary-market efficiency.
This latest batch of filings from Cboe adds to a growing number of requests for in-kind flexibility. Nasdaq has petitioned to convert BlackRock’s iShares Bitcoin Trust to in-kind transactions, following language in its January 2024 S-1 filing allowing the switch pending regulatory approval. Additionally, a Federal Register notice in late May outlined full in-kind mechanics for an Ethereum trust on Nasdaq, specifying how authorized participants would deliver or receive ether. NYSE Arca hosts Bitwise’s Bitcoin and Ethereum ETFs, which initially proposed pure in-kind baskets. Together, these filings make up a queue that the SEC must clear before any crypto fund can move beyond the cash-only model adopted at launch.