In a significant regulatory shift, the U.S. Securities and Exchange Commission (SEC) has approved the use of “in-kind” creation and redemption mechanisms for cryptocurrency exchange-traded products (ETPs). This decision, finalized on July 26, 2025, is set to revolutionize the structure, efficiency, and scalability of crypto ETFs.
What Are In-Kind ETPs?
An exchange-traded product (ETP), including exchange-traded funds (ETFs), typically allows institutional participants to create and redeem shares. In traditional markets, this process can occur in two ways:
- In-Cash: Participants deliver or receive cash.
- In-Kind: Participants deliver or receive the underlying asset (e.g., bitcoin or ethereum).
Until now, U.S. crypto ETFs operated via cash-based creation and redemption, meaning firms had to convert crypto to fiat and back again—introducing friction, fees, and tax complications.
With the SEC’s approval, crypto ETPs can now operate in-kind, streamlining the process and improving fund efficiency.
Background: The Long Road to Crypto ETF Evolution
Since the approval of the first spot Bitcoin ETFs in January 2024, industry leaders have lobbied the SEC to allow in-kind processes—standard for equity and commodity ETFs.
Firms like BlackRock, Fidelity, Grayscale, and Bitwise argued that in-kind mechanisms:
- Reduce operational risk
- Lower transaction fees
- Avoid unnecessary taxable events
- Increase market liquidity
The SEC was initially hesitant, citing custody, market manipulation, and anti-money laundering concerns. However, after over a year of legal reviews, pilot programs, and dialogue with fund managers, the regulator issued its approval last Friday.
What the SEC Says
SEC Chair Gary Gensler, once cautious about digital assets, issued a cautiously optimistic statement:
“We believe that permitting in-kind creations and redemptions—under strict custodial and compliance safeguards—can help bring crypto ETPs in line with the broader ETF ecosystem.”
The approval applies specifically to Bitcoin and Ethereum ETPs but could be expanded later.
To qualify, ETP providers must:
- Use qualified digital custodians
- Submit detailed compliance audits
- Prove strong AML/KYC protocols
- Pass liquidity and volatility stress tests
Why It Matters: Lower Fees, Greater Access
This policy change is a game-changer for institutional crypto adoption.
Here’s why:
- Lower Fund Costs
In-kind redemptions reduce slippage and trading fees, allowing ETF providers to lower expense ratios. - Better Tax Efficiency
Investors can defer taxable events by holding ETF shares instead of trading the underlying crypto directly. - Scalable Liquidity
In-kind mechanisms support larger volume without overloading fiat ramps, making the system more scalable.
Katherine Dowling, General Counsel at Bitwise, commented:
“This aligns crypto ETFs with the most efficient fund structures globally. It unlocks trillions in institutional capital.”
Market Reaction: Surge in Crypto ETF Interest
Following the announcement, Bitcoin and Ethereum ETF trading volumes spiked over 30% on Monday, and ETF-focused firms saw a bump in pre-market trading.
- BlackRock’s IBIT saw its largest single-day inflow since launch: $450 million.
- Grayscale Bitcoin Trust (GBTC) narrowed its discount to NAV from 6.1% to 2.8%.
- Valkyrie, WisdomTree, and VanEck all issued statements confirming they would adopt in-kind mechanisms by Q4 2025.
Analysts estimate that crypto ETP assets under management (AUM) could double by mid-2026—from $65 billion to over $130 billion.
Institutional Boost: Family Offices and Pension Funds Eye Entry
Many institutional investors have remained on the sidelines due to compliance concerns and operational bottlenecks. The in-kind approval removes a key barrier.
Ravi Menon, CIO of a New York-based family office, noted:
“Tax efficiency and operational clarity matter more than hype. With in-kind approval, we’re seriously considering exposure to Bitcoin ETFs in our portfolio.”
Crypto ETF providers are now working with registered investment advisors (RIAs) to build ETF products tailored to high-net-worth clients, pensions, and even insurance companies.
Competitive Global Landscape: U.S. Now on Par With Canada and Europe
Canada has allowed in-kind redemptions for crypto ETFs since 2021. Europe’s 21Shares and CoinShares have also offered crypto ETPs with more flexibility than the U.S. market.
This latest move brings the U.S. into regulatory alignment, helping it stay competitive in the evolving digital asset ecosystem.
With Hong Kong and Dubai also expanding crypto fund access, regulatory competition is heating up.
Technical Innovations Behind the Shift
The SEC’s decision reflects confidence in crypto infrastructure improvements, including:
- Qualified custodians like Coinbase Custody and BitGo meeting SEC standards
- Adoption of multi-signature wallets and layer-2 audit trails
- Real-time reporting and tokenized settlement technologies
This convergence of tech and compliance was essential to convincing regulators that in-kind crypto ETPs could be secure and scalable.
Challenges and Caveats
Despite the good news, hurdles remain:
- Operational Complexity:
Not all fund administrators are equipped to process in-kind transactions in crypto. - Volatility Risks:
Sudden crypto price swings during redemptions could create NAV imbalances. - Custodian Limitations:
Some asset managers may still be restricted by custodians not yet approved by the SEC. - Limited to BTC/ETH:
Altcoin-based ETFs still face stricter scrutiny and cash-only rules—for now.
What’s Next? Ethereum Staking ETFs and Altcoin Products
With this green light, attention is turning to the next phase of ETF evolution:
- Ethereum staking ETFs: Now more viable with in-kind staking redemption models
- Solana and Avalanche ETPs: Firms may apply for in-kind status if approved as commodities
- Multi-asset ETPs: Could follow with proper regulatory risk disclosures
Industry groups like Digital Asset Investment Council (DAIC) have begun lobbying the SEC to expand the in-kind policy to a broader range of crypto products.
Final Thoughts
The SEC’s approval of in-kind crypto ETPs marks a historic turning point in the convergence of traditional finance and digital assets. With lower costs, improved liquidity, and greater tax efficiency, this change could accelerate institutional crypto adoption and reshape the global ETF landscape.
While implementation may take time, the message is clear: crypto is moving into the financial mainstream—with regulatory clarity lighting the path.
