The U.S. Securities and Exchange Commission is on the verge of revamping spot Bitcoin and Ethereum exchange-traded funds. This shift follows the simultaneous requests from five Cboe BZX-listed products to transition from a cash-only creation and redemption model to an in-kind mechanism, a system already familiar to commodity and equity ETFs.
On July 22, filings were made for the ARK 21Shares Bitcoin ETF and the 21Shares Core Ethereum ETF (combined in SR-CboeBZX-2025-010 Amendment No. 3), WisdomTree’s Bitcoin Fund (SR-CboeBZX-2025-033 Amendment No. 1), and both the Fidelity Wise Origin Bitcoin Fund and Fidelity Ethereum Fund (SR-CboeBZX-2025-023 Amendment No. 1). These amendments revise language in the early-2024 approval orders that restricted the trusts to cash transactions, replacing it with “cash or in-kind transactions” and detailing settlement workflows for direct transfers of Bitcoin or Ether between the trust’s custodian and an authorized participant.
James Seyffart, a Bloomberg ETF analyst, who identified this coordinated effort, informed his followers on X that these filings signal progress towards Bitcoin and Ethereum ETFs gaining the ability to utilize in-kind creation and redemption. He noted, “This suggests positive movement and possible fine-tuning with the SEC.”
To clarify potential misunderstandings, Seyffart added, “This change isn’t for retail investors to exchange their ETF shares for the underlying asset. It’s meant for Authorized Participants, such as major Wall Street firms and market makers. This adjustment will enhance the efficiency of current and future crypto ETFs, but most people won’t notice a difference as the existing products already trade highly efficiently. This aligns crypto ETPs with other ETPs.”
Discussing when retail investors might engage in in-kind redemptions, Seyffart remarked, “It would be exciting if consumers could withdraw and deposit actual ETH into the ETF at a specific threshold. I believe such withdrawals will eventually occur, though it might be far in the future. This process is already available for some gold ETFs.”
#### Why In-Kind Transactions are Crucial for Bitcoin and Ether ETFs
Under the cash model implemented when spot Bitcoin ETPs were approved on January 10, 2024, an Authorized Participant (AP) delivers cash to the fund, which then purchases the cryptocurrency in the spot market, reversing the process for redemptions. This design addressed SEC concerns about custody and settlement risk but created two issues: the trust must trade in the underlying market, and resultant order flow can deviate net asset value from share price when spot liquidity is low.
In-kind processing returns these trades to authorized participants. When creating shares, the AP transfers Bitcoin or Ether directly to the fund’s cold wallet; during redemptions, it receives coins instead of cash. This structure, common in the ETF ecosystem, is linked to tighter spreads, reduced primary-market imbalances, and notable tax benefits, as portfolio securities—or in this case, crypto-assets—are distributed “in kind,” avoiding capital gains inside the fund. The SEC itself acknowledges that ETFs “can be more tax efficient… because ETF shares generally are redeemable ‘in-kind’.”
Commodity trusts that already use in-kind redemptions serve as the regulatory model the crypto issuers are referencing. For instance, SPDR Gold Shares allows an authorized participant to swap a 100,000-share basket for physical bullion, facilitating an individual investor to “take physical possession of the gold backing their shares,” albeit through a broker-assisted arrangement. By adopting similar language, the Bitcoin and Ether trusts argue for equal treatment with existing commodity ETPs.
Operational demands have also increased as primary-market volumes expand. Since launch, the eleven spot Bitcoin ETFs approved in 2024 have accumulated nearly $55 billion in net inflows; market-making desks face the challenge of sourcing billions of dollars at 4 p.m. each settlement day, then unwinding the crypto exposure after the trust’s coin purchases. This process strains balance sheets and broadens spreads during volatile sessions. Enabling in-kind transactions allows desks to source or hedge Bitcoin and Ether continuously, delivering the assets directly into the trust’s wallet at T+0.
As of now, BTC is trading at $118,769.
