July 29, 2025, the U.S. Securities and Exchange Commission (SEC) has authorized crypto Exchange-Traded Products (ETPs), including those for Bitcoin and Ethereum, to adopt a "physical redemption" (or "in-kind") mechanism, a significant shift from the previously required "cash-only" model.

IMPLICATIONS

In simple terms, the ETFs redemptions can be held in tokens instead of having to forego conversion to cash/fiat for withdrawals, which will prevent the transactions from exerting unnecessary selling pressure during ordinary conditions.

Here is more in detail:

  • Cash-only redemption (previous model): When an authorized participant (AP) wanted to redeem shares of a Bitcoin or Ethereum ETF, they would deliver dollars to the fund, and the fund would then sell the cryptocurrency on the spot market. This process would reverse for creation.

  • Physical (in-kind) redemption (newly approved): This allows APs to directly exchange large quantities of ETF shares with the issuer for the underlying cryptocurrency ($BTC $ETH ) held by the fund. Conversely, for creation, APs can directly send Bitcoin or Ether to the fund's cold wallet to receive new ETF shares.

Why is this significant?

  • Operational efficiency: It simplifies the process for market makers and authorized participants, reducing the need for constant cash conversions and associated transaction costs.

  • Tax efficiency: In-kind redemptions generally do not trigger taxable events for the fund or the authorized participant in the same way cash redemptions can, potentially making the ETFs more tax-efficient for investors.

  • Alignment with traditional ETFs: This brings Bitcoin and Ethereum ETPs more in line with how traditional commodity and equity ETFs operate, which typically use in-kind creation and redemption.

  • Increased mainstream acceptance: This move by the SEC further signals a growing acceptance of digital assets within traditional financial frameworks.

This approval has been widely anticipated and is seen as a positive development for the crypto ETF market.

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