Written by: Fintax
1. Policy Overview and Event Background
1.1 Overview of SEC Policies
On July 29, 2025, the U.S. Securities and Exchange Commission (SEC) allowed authorized participants (APs) to create and redeem physical crypto exchange-traded products (ETPs). Additionally, the SEC approved a new model for options trading on spot Bitcoin ETFs. This includes the introduction of Flexible Exchange Options (FLEX) and customizable derivatives, giving market participants more say in the contract features, including strike prices, expiration dates, and exercise styles. Moreover, the SEC expanded the position limit for Bitcoin ETF options from 25,000 contracts to 250,000 contracts, marking a significant shift in the U.S. securities regulator's approach to the cryptocurrency sector, providing a more relaxed policy environment for ETP issuers, authorized participants, and investors, while enhancing trading efficiency and market liquidity.
1.2 Differences Between Crypto Asset ETPs and Traditional ETFs
Exchange-traded products (ETPs) are investment products listed and traded on national securities exchanges, including exchange-traded funds (ETFs), exchange-traded notes (ETNs), and exchange-traded commodities (ETCs). Crypto asset ETPs are typically established in trust form, holding assets consisting of spot crypto assets or derivatives that are pegged to crypto assets. The trust, as a securities issuer, registers its securities issuance and categories under the Securities Act of 1933 and the Securities Exchange Act of 1934, and is subject to federal securities law anti-fraud provisions.
ETFs are registered under the Investment Company Act of 1940. ETF issuers rely on authorized participants to create and redeem ETF shares in exchange for securities or a basket of securities tracked by the ETF. Authorized participants then trade ETF shares on the exchange (i.e., the secondary market).
The reporting requirements for ETPs differ from those for ETFs. ETPs must submit annual audited financial statements (Form 10-K) and quarterly financial statements (Form 10-Q). This is consistent with the requirements for traditional companies listed on U.S. stock exchanges. In contrast, although ETFs also need to submit annual audited financial statements (Form N-CSR), they only need to submit additional semi-annual financial statements.
2. Evolution of Crypto Asset ETP Regulation in the U.S.
2.1 Development History of Crypto Asset ETPs
Since Winklevoss first submitted a Bitcoin ETF application proposal to the U.S. SEC in 2013, multiple issuers have attempted to obtain permission to create Bitcoin ETFs, but U.S. regulators have rejected various attempts.
In October 2021, the SEC approved the first Bitcoin futures ETF in the U.S.: ProShares Bitcoin ETF (BITO). Following the approval of this futures ETF, the SEC faced a court lawsuit regarding the conversion of over-the-counter (OTC) Bitcoin spot products into ETPs.
On August 29, 2023, the D.C. Circuit Court of Appeals granted the applicant's appeal request and overturned the SEC's previous denial decision. Shortly thereafter, on October 2023, the SEC approved the listing of futures Ethereum ETPs. This ruling also paved the way for the final approval of spot Bitcoin ETPs in January 2024.
On January 10, 2024, the SEC approved the listing and trading of multiple spot Bitcoin ETPs. Initially, most spot Bitcoin ETP applications indicated they would adopt a physical creation and redemption model. However, during the SEC's public consultation period, all applications were amended to adopt only cash creation and redemption. Before this approval, all applications for spot Bitcoin ETPs failed due to investor protection issues, potential risks of price manipulation, and the lack of monitoring-sharing agreements with larger regulated Bitcoin markets.
On May 23, 2024, the SEC approved the exchange rule changes allowing for the listing and trading of various spot Ethereum ETPs. The cash creation and redemption model has also been extended to spot Ethereum ETPs.
2.2 Latest Regulatory Developments for Crypto Asset ETPs
2.2.1 SEC Releases New Disclosure Guidelines for Crypto Asset ETPs
On July 1, 2025, the U.S. SEC's Division of Corporation Finance released new disclosure guidelines for crypto asset ETPs, aiming to provide clear issuance and registration guidelines under federal securities law, promoting standardized market operations.
The guidelines specify that issuers of crypto asset ETPs must complete product issuance and registration-related information disclosures as required by U.S. securities laws and the Securities Exchange Act. This includes risk factors, business descriptions, service providers of the trust, custody of trust assets, fees and expenses, securities descriptions, distribution plans, management, conflicts of interest, financial statements, etc.
In the short term, these guidelines may suppress the issuance of some products with insufficient information disclosure, prompting investors to reassess risk premiums, leading to capital outflow pressures for ETP products. In the long run, this move will accelerate the applications and implementations of leading institutional products, reduce regulatory uncertainties and compliance costs, and create a more mature and orderly crypto asset investment ecology.
2.2.2 Exchange-Driven Common Listing Standards for Crypto ETPs
It is noteworthy that in addition to the critical step taken in the operation model of crypto ETPs, their listing channels are also expected to see significant optimization.
Cboe BZX, Nasdaq, and NYSE Arca submitted a significant rule amendment proposal to the SEC. The proposal aims to establish common listing and trading standards for commodity trust stocks to expedite the approval process for public trading of such products. Under current rules, exchanges must submit Form 19b-4, triggering a maximum review period of 240 days. The proposed framework could shorten this time, institutionalizing and standardizing the 'one coin, one review' listing process. This will help significantly simplify the listing process, reduce issuance costs, and open efficient and transparent listing channels for commodity ETPs, including crypto assets.
3. Industry Significance of the Physical Creation and Redemption Mechanism
3.1 Comparison of Physical and Cash Creation and Redemption Mechanisms
Before this approval, spot Bitcoin and Ethereum ETPs in the U.S. market were required to adopt a cash creation and redemption model. This meant that when authorized participants (usually traditional giants like Goldman Sachs, JPMorgan, or professional market makers) purchased ETP shares, they had to first provide cash to the issuer, which would then purchase Bitcoin or Ethereum on the spot market. Upon redemption, the issuer had to first sell the crypto assets for cash before delivering it to the authorized participants.
The physical creation and redemption model allows authorized participants to directly deliver actual Bitcoin or Ethereum to the ETP issuer to create new shares. Upon redemption, the ETP issuer can directly deliver the corresponding crypto assets to the authorized participants. Therefore, the issuer does not need to manage large cash flows and crypto asset flows and can complete complex buy-sell operations in a short time.
3.2 Positive Impact on the Crypto Asset Market
The physical creation and redemption has significant advantages in controlling trading costs and slippage, reducing potential tax burdens, improving asset pricing efficiency, and enhancing market liquidity.
(1) Trading Costs and Slippage: Cash creation and redemption, accompanied by large-scale sales of crypto assets, lead to accumulated trading fees and slippage during bulk trades. Applying the physical creation and redemption model to crypto ETPs can reduce trading friction and provide greater flexibility for issuers and market makers.
(2) Tax Burden: According to the IRS, when investors convert cryptocurrency to fiat currency involving capital gains tax, they need to subtract their cost basis from the sale price to calculate capital gains or losses and pay the corresponding capital gains tax. Cash creation and redemption correspond to the buying and selling of crypto assets, thus increasing tax complexity and potentially leading to a capital gains tax burden, which is often ultimately passed on to investors. The physical creation and redemption model allows investors to defer the realization of capital gains until sale, providing more flexible tax arrangements.
(3) Pricing Efficiency: Cash creation and redemption can lead to discrepancies between the market price of ETPs and their net asset values, especially during periods of high market volatility, resulting in premiums or discounts. A large volume of cash creation and redemption may also lead issuers to frequently adjust their asset portfolios, causing price fluctuations in ETPs. Physical creation and redemption help maintain consistency between ETP prices and their net asset values, improving pricing efficiency and maintaining fairness and transparency in trading prices.
(3) Market Liquidity: The physical creation and redemption model is commonly used in traditional stock and ETP markets. The shift in the redemption model will place crypto asset ETPs on the same operational footing as traditional commodity ETPs, expanding the accessibility and scope of crypto derivatives financial products, thereby facilitating traditional industry institutions' investment in the crypto space.
As Bloomberg analyst James Seyffart pointed out, by approving the physical creation and redemption process for Bitcoin and Ethereum ETFs, the SEC has paved the way for future altcoin (such as those based on Solana, XRP, etc.) ETF physical creation and redemption models.
4. Conclusion
The SEC's first approval of the physical creation and redemption mechanism for crypto asset ETPs adds a crucial element to the institutional framework of the crypto financial market. The physical creation and redemption make the circulation logic of crypto assets closer to that of traditional ETFs, providing a mature path for institutional funds to enter the market compliantly.
Meanwhile, regulators are accelerating the improvement of supporting systems. The SEC's latest disclosure guidelines for crypto asset ETPs clarify the registration and information disclosure requirements for relevant products under the federal securities law framework for the first time, providing clearer compliance references for issuers and investors.
The actions on the exchange side are also noteworthy. Cboe BZX, Nasdaq, and NYSE Arca have submitted rule amendment proposals to the SEC, planning to establish common listing standards for commodity trust stocks to streamline the listing approval process for crypto ETPs. If this reform is implemented, it is expected to solve the longstanding issues of 'queue difficulties and slow approvals' and significantly enhance market efficiency and transparency.
Overall, whether it is the physical creation and redemption mechanism at the structural level or the new disclosure regulations at the policy level, they all point to the same clear trend: crypto assets are rapidly moving toward a clearer, more regulated, configurable development stage that is highly aligned with traditional financial operating logic. The market's direction is shifting from defensive regulation to proactive embrace, from speculation-driven to value allocation. Future competition may no longer stay at the product design level but will focus on who can find the best balance between compliance and risk control first, building a robust and sustainable crypto asset investment system.
