US SEC gives green light, crypto ETFs enter commodity era
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US SEC gives green light, crypto ETFs enter commodity era
The U.S. SEC approves physical creation and redemption of crypto ETFs, integrating crypto assets into the deep structure of mainstream finance.
Navigating Web3 tides with focused insightsAuthor: Golem, Odaily Planet Daily
On July 29, the U.S. SEC officially allowed Authorized Participants (APs) to create and redeem crypto ETFs in kind. This means that Bitcoin and Ethereum ETFs will now align with other commodity-based ETFs (such as oil and gold) by permitting the creation and redemption of ETF shares through in-kind transactions, whereas previously Bitcoin and Ethereum ETFs were limited to cash-based creation and redemption.
Cash-Based vs. In-Kind
What are the differences between creating and redeeming crypto ETFs using cash versus in-kind methods?
Cash-Based: APs Settle with ETF Issuers Using Cash
The previous process for creating and redeeming Bitcoin and Ethereum ETF shares via cash was briefly as follows:
ETF Creation Process
The ETF issuer publishes daily the cash amount representing the total required to create one "creation unit";
Authorized Participants (APs) deliver cash to the ETF issuer;
Upon receiving the cash, the ETF issuer purchases the corresponding quantity of crypto assets in the market and deposits them into the ETF custody pool;
The ETF issuer then issues the corresponding number of ETF shares to the AP.
ETF Redemption Process
When the ETF's market price falls below its Net Asset Value (NAV) for the day, APs purchase the corresponding number of ETF shares on the secondary market;
The AP returns these shares to the ETF issuer;
The ETF issuer sells the corresponding amount of Bitcoin/Ethereum based on the redeemed shares, converting them back into cash in the spot market;
The issuer then returns this cash to the AP, completing the redemption.
In-Kind: APs Settle with ETF Issuers Using "In-Kind" Assets (i.e., Coins)
ETF Creation Process
The ETF issuer defines a "creation unit," typically tens of thousands of ETF shares, whose corresponding Net Asset Value (NAV) represents the total amount of crypto assets the AP must deliver;
The AP "packages" the specified basket of crypto assets and transfers them to a designated custodial account via a pre-agreed secure custody and transfer protocol with the ETF issuer;
After verifying the received assets, the issuer delivers the corresponding number of ETF shares to the AP.
ETF Redemption Process
When the ETF's market price on the exchange falls below its NAV, the AP purchases at least one creation unit's worth of ETF shares on the secondary market;
The AP returns this batch of ETF shares to the issuer and submits an "in-kind redemption" request;
Upon confirming receipt of the ETF shares, the issuer transfers back an equivalent value of crypto assets (based on the latest NAV and portfolio weights) from the custodial account to the AP via the same route;
The AP recovers the corresponding crypto assets.
What Is the Significance?
From the above, it is clear that allowing in-kind creation and redemption of crypto ETFs does not mean ordinary investors can directly exchange their ETF shares for crypto assets. Instead, it signifies that the settlement medium between Authorized Participants (APs) and ETF issuers has shifted from cash to "crypto in-kind." This not only means existing crypto ETF assets (such as Bitcoin and Ethereum) have achieved regulatory parity with commodities like gold and oil, but also brings the following benefits:
Reduced Costs for APs and Improved Market Efficiency
Under the cash-based model, ETF issuers must use cash delivered by APs to purchase crypto assets. Given the fast-moving nature of crypto markets, this process may increase transaction fees and slippage.
With in-kind creation, APs directly deliver crypto assets to the ETF issuer, effectively avoiding additional transaction costs and slippage, thus lowering overall costs. Additionally, by eliminating delays and expenses from spot market trading, the process streamlines coordination with ETF issuers and enables the ETF's secondary market price to track its NAV more closely, enhancing market efficiency.
Moreover, cash transactions may trigger capital gains distributions at the fund level, whereas in-kind transfers generally do not constitute capital gains at the fund level, further reducing tax burdens for APs.
Reduced Market Impact from ETF Redemptions on Crypto Prices
Under the cash-based model, ETF redemptions require the issuer to passively sell large quantities of crypto assets in the market to obtain cash, potentially triggering "liquidity stampedes."
However, under the in-kind model, ETF redemptions simply involve the issuer returning crypto assets to the AP without any market transaction. Whether the AP immediately sells the received Bitcoin or Ethereum, how they sell, and to whom, depends entirely on their own strategy. Compared to the ETF fund conducting a single large-scale liquidation, AP actions are more dispersed, market-driven, and flexible.
Providing More Efficient Mechanisms for ETF Arbitrageurs
The foundation of ETF market arbitrage lies in the "primary market arbitrage" mechanism, where APs exploit price differences between the ETF's market price and its NAV through creation/redemption. Under the cash-based model, time lags between spot trading and ETF creation/redemption may lead to failed arbitrages or increased costs. With in-kind processing, APs can directly establish or close positions using crypto assets, resulting in higher arbitrage efficiency, larger scale, and faster execution.
At the same time, a more efficient arbitrage mechanism helps crypto ETF prices track their net asset values more closely, thereby improving liquidity.
Integration of Crypto Assets into the Deep Structure of Mainstream Finance
Major global commodity ETFs—such as those for gold, silver, and crude oil—typically use in-kind creation and redemption. The adoption of the same mechanism by crypto ETFs signifies that crypto assets are being integrated into the core structure of mainstream financial products, promoting global institutional allocation to crypto assets.
The introduction of in-kind mechanisms provides structural buffers for future large-scale capital inflows, facilitating participation by institutions, pension funds, hedge funds, and other long-term investors.
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