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 engage in physical creation and redemption of crypto asset exchange-traded products (ETPs).
Additionally, the SEC has approved a new model for trading options on spot Bitcoin ETFs. This includes the introduction of Flexible Exchange Options (FLEX) and customizable derivatives, giving market participants more say in contract characteristics, including exercise price, expiration date, and exercise style.
Moreover, the SEC has also expanded the position limit for Bitcoin ETF options from 25,000 contracts to the original ten times, i.e., 250,000 contracts. This move marks a significant shift by U.S. securities regulators in the cryptocurrency field, providing ETP issuers, authorized participants, and investors with a more relaxed policy space while also enhancing trading efficiency and market liquidity.
1.2 Differences Between Crypto Asset ETPs and Traditional ETFs
Exchange-traded products (ETPs) are investment products that are 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 composed of spot crypto assets or derivatives anchored to crypto assets. Trusts, as securities issuers, register their securities issuance and categories according to the (Securities Act of 1933) and (Securities Exchange Act of 1934), and are 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 baskets 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, while 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 U.S. Crypto Asset ETP Regulation
2.1 Development History of Crypto Asset ETPs
Since Winklevoss first submitted a Bitcoin ETF application proposal to the 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). After 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 Washington 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 paves 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 applications for spot Bitcoin ETPs indicated that they would adopt physical creation and redemption. However, during the SEC's comment period, all applications were revised to adopt only cash creation and redemption. Before this approval, all applications for spot Bitcoin ETPs had 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 changes to exchange rules, 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 Guidance for Crypto Asset ETPs
On July 1, 2025, the SEC's Division of Corporation Finance released new disclosure guidance for crypto asset ETPs, aiming to provide clear issuance and registration guidance for crypto asset ETPs under the federal securities law framework to promote orderly market operations.
The guidance states that the issuers of crypto asset ETPs must complete product issuance and registration-related information disclosure as required by U.S. (Securities Act) and (Securities Exchange Act) regulations. This includes risk factors, business descriptions, service providers for the trust, custody of trust assets, as well as fees and expenses, securities descriptions, distribution plans, management, conflicts of interest, financial statements, etc.
In the short term, this guidance may suppress the issuance of products that lack sufficient information disclosure, prompting investors to reassess risk premiums and putting pressure on ETP products facing capital outflows. In the long term, this move will accelerate the application and landing of leading institutional products, reduce regulatory uncertainty and compliance costs, and create a more mature and orderly crypto asset investment ecology.
2.2.2 Exchanges Promote Universal Listing Standards for Crypto ETPs
It is worth noting that in addition to the key step taken in the operational model of crypto ETPs, its listing channels are also expected to be significantly optimized.
Cboe BZX, Nasdaq, and NYSE Arca have submitted a significant rule amendment proposal to the SEC. The proposal aims to establish universal listing and trading standards for commodity trust stocks, intending to expedite the approval process for public trading of such products. Under current rules, exchanges must submit Form 19b-4, triggering a maximum 240-day review period. The proposed framework may shorten this time, institutionalizing and standardizing the 'one coin, one review' listing process. This will significantly simplify the listing process, reduce issuance costs, and open efficient and transparent listing channels for commodity-like 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 (typically traditional giants like Goldman Sachs, JPMorgan, or professional market makers) created ETP shares, they had to first deliver 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 to the authorized participants.
The physical creation and redemption model allows authorized participants to directly deliver real 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. Thus, issuers do 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
Physical creation and redemption have significant advantages in controlling transaction costs and slippage, reducing potential tax burdens, improving asset pricing efficiency, and enhancing market liquidity.
(1) Transaction Costs and Slippage: Cash creation and redemption involve large-scale crypto asset sales, leading to accumulated transaction costs 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 IRS regulations, when converting cryptocurrencies into fiat currency involving capital gains tax, investors need to subtract their cost basis from the sale price to calculate capital gains or losses and pay corresponding capital gains taxes. Cash creation and redemption correspond to the buying and selling of crypto assets, thus increasing tax complexity and potentially leading to capital gains tax burdens, which are often passed on to investors. The physical creation and redemption model allows investors to defer the occurrence of capital gains until sale, providing greater flexibility in tax arrangements.
(3) Pricing Efficiency: Cash creation and redemption can lead to discrepancies between the market price of the ETP and its net asset value, especially during periods of high market volatility, resulting in premiums or discounts. A large number of cash creations and redemptions may also cause issuers to frequently adjust their asset portfolios, leading to price fluctuations of the ETP. Physical creation and redemption help maintain the alignment of ETP prices with their net asset values, improve pricing efficiency, and uphold fairness and transparency in trading prices.
(3) Market Liquidity: The physical creation and redemption model is typically used in traditional stock and ETP markets. The shift in creation and redemption models will place crypto asset ETPs in the same operational state as traditional commodity ETPs, expanding the accessibility and scope of crypto derivatives financial products, thereby facilitating traditional industry institutions to inject capital into the crypto field.
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 Solana, XRP, etc.) ETF physical creation and redemption models.
4. Conclusion
The SEC has approved the introduction of a physical creation and redemption mechanism for crypto asset ETPs for the first time, adding a key element to the institutional development of the crypto financial market. Physical creation and redemption make the circulation logic of crypto assets closer to traditional ETFs, providing a mature pathway for institutional funds to enter compliantly.
At the same time, regulators are accelerating the improvement of supporting systems. The SEC's latest guidance on crypto asset ETP disclosures clearly outlines the registration and information disclosure requirements for related products under the federal securities law framework, providing issuers and investors with clearer compliance references.
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 universal listing standards for commodity trust stocks to streamline the listing approval process for crypto ETPs. If this reform can be 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 at the mechanism level or the new disclosure regulations at the policy level, they all point to a clear trend: crypto assets are accelerating towards a clearer, more regulated, configurable development stage that closely aligns with traditional financial operating logic. The market's direction is shifting from defensive regulation to proactive embrace, moving from speculation-driven to value allocation. Future competition may no longer remain 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.
