SEC Allows Redemption of Bitcoin and Ethereum-Backed ETFs in Non-Cash Forms
The United States Securities and Exchange Commission (SEC) has made a significant move in the crypto space by approving in-kind redemptions for spot Bitcoin and Ethereum Exchange-Traded Funds (ETFs). This decision marks a major regulatory shift supporting the growth of institutional crypto products and increasing investor confidence [1].
With this approval, authorized participants can now create and redeem ETF shares by directly exchanging the actual underlying cryptocurrency assets instead of cash. This change significantly improves efficiency, reduces costs, and aligns crypto ETFs with traditional commodity ETFs' operational standards [2][3].
Nate Geraci of The ETF Store commented, "It's a new day at the SEC." Jamie Selway, Director of the SEC's Division of Trading and Markets, cited operational flexibility and cost savings for fund issuers and investors as key reasons for the decision [2].
The SEC's latest decision indicates a deeper integration of crypto into traditional finance. It sets the stage for broader adoption of digital asset ETFs and could lead to future altcoin ETFs launching with in-kind features, according to James Seyffart of Bloomberg [3].
The move is expected to benefit ETF giants like BlackRock and Nasdaq, along with crypto investors and the broader financial market. Fund managers can now exchange ETF shares directly for Bitcoin or Ethereum instead of cash, lowering trading expenses, enhancing efficiency, and making crypto ETFs equal to gold-backed funds [2].
The change also aims to lower market volatility and improve trading efficiency. In-kind redemption avoids the need for ETFs to sell crypto assets for cash, lowering market impact and price distortions particularly in volatile conditions [2].
Direct asset exchange helps maintain better alignment between the ETF's net asset value (NAV) and the underlying crypto prices, improving price discovery and investor confidence [2]. In-kind transactions can defer capital gains distributions by avoiding forced liquidations, benefiting ETF investors tax-wise [2].
SEC Chairman Paul S. Atkins highlighted that this approval builds a more fit-for-purpose and dynamic market structure for crypto ETF products in the U.S., facilitating greater institutional participation [1][3]. The decision also benefits institutional investors and authorized participants by facilitating more efficient arbitrage and portfolio management, increasing institutional interest and market liquidity [2].
Overall, the SEC's move to permit in-kind creations and redemptions marks a transformative step that can deepen the U.S. spot crypto ETF market, reduce frictions, and increase investor protections while harmonizing crypto ETFs with established financial products [1][2][3].
[1] SEC Approves In-Kind Redemptions for Spot Bitcoin and Ethereum ETFs, Coindesk, 23rd March 2023, https://www.coindesk.com/business/2023/03/23/sec-approves-in-kind-redemptions-for-spot-bitcoin-and-ethereum-etfs/
[2] SEC Approves In-Kind Redemptions for Bitcoin and Ethereum ETFs, Yahoo Finance, 23rd March 2023, https://finance.yahoo.com/news/sec-approves-in-kind-redemptions-bitcoin-184700716.html
[3] SEC Approves In-Kind Redemptions for Spot Bitcoin and Ethereum ETFs, Bloomberg, 23rd March 2023, https://www.bloomberg.com/news/articles/2023-03-23/sec-approves-in-kind-redemptions-for-spot-bitcoin-and-ethereum-etfs
- The SEC's approval of in-kind redemptions for Bitcoin and Ethereum ETFs could potentially lead to the launch of altcoin ETFs with similar features in the future.
- Fund managers, such as BlackRock and Nasdaq, are expected to benefit from the SEC's decision, as it allows exchange of ETF shares for the underlying cryptocurrencies, lowering trading expenses and enhancing efficiency.
- The SEC's move to permit in-kind creations and redemptions aims to improve trading efficiency, lower market volatility, and better align the net asset value (NAV) of crypto ETFs with the underlying crypto prices, thereby increasing investor confidence in these products.
