U.S. SEC approves physical creation and redemption for crypto ETPs, boosting crypto finance once again
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U.S. SEC approves physical creation and redemption for crypto ETPs, boosting crypto finance once again
Physical redemption makes the circulation logic of crypto assets more similar to traditional ETFs, providing a mature pathway for institutional capital to enter in a compliant manner.
Navigating Web3 tides with focused insightsAuthor: Fintax
1. Policy Overview and Event Background
1.1 SEC Policy Overview
On July 29, 2025, the U.S. Securities and Exchange Commission (SEC) permitted authorized participants (APs) to conduct in-kind creation and redemption of crypto asset exchange traded products (ETPs).
In addition, the SEC approved a new model for spot bitcoin ETF options trading. This includes introducing Flexible Exchange Options (FLEX) and customizable derivatives, giving market participants greater input on contract terms such as strike price, expiration date, and exercise style.
Furthermore, the SEC increased the position limit for bitcoin ETF options from 25,000 contracts to ten times that amount—250,000 contracts. This move marks a significant shift by U.S. securities regulators in the cryptocurrency space, not only providing ETP issuers, authorized participants, and investors with more favorable policy conditions but also enhancing trading efficiency and market liquidity.
1.2 Differences Between Crypto Asset ETPs and Traditional ETFs
Exchange-traded products (ETPs) are investment vehicles 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 structured as trusts holding assets composed of either spot crypto assets or derivatives linked to crypto assets. As security issuers, these trusts register their securities and classes under the Securities Act of 1933 and the Securities Exchange Act of 1934, and are subject to the anti-fraud provisions of federal securities laws.
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 baskets of securities or the underlying securities tracked by the ETF. Authorized participants then trade ETF shares on exchanges (i.e., secondary markets).
Reporting requirements for ETPs differ from those for ETFs. ETPs must file annual audited financial statements (Form 10-K) and quarterly financial reports (Form 10-Q), consistent with requirements for traditional companies listed on U.S. stock exchanges. In contrast, while ETFs also file annual audited financial statements (Form N-CSR), they are only required to submit semiannual financial reports.
2. Evolution of U.S. Crypto Asset ETP Regulation
2.1 Development History of Crypto Asset ETPs
Since Winklevoss first submitted a proposal for a Bitcoin ETF to the U.S. SEC in 2013, multiple issuers have attempted to obtain approval for Bitcoin ETFs, but U.S. regulators rejected various applications.
In October 2021, the SEC approved the first U.S. Bitcoin futures ETF: ProShares Bitcoin ETF (BITO). Following this approval, the SEC faced a court case regarding converting over-the-counter (OTC) spot Bitcoin products into ETPs.
On August 29, 2023, the U.S. Court of Appeals for the District of Columbia Circuit granted the petitioner's appeal and vacated the SEC’s prior denial. Shortly afterward, in October 2023, the SEC approved the listing of futures-based Ethereum ETPs. This ruling 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 use in-kind creation and redemption. However, during the SEC’s comment period, all applications were revised to adopt cash-only creation and redemption. Prior to this approval, all spot Bitcoin ETP applications had been rejected due to investor protection concerns, potential risks of price manipulation, and the lack of surveillance-sharing agreements with large, regulated Bitcoin markets.
On May 23, 2024, the SEC approved rule changes allowing the listing and trading of multiple spot Ethereum ETPs. The cash creation and redemption model was also 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 Division of Corporation Finance at the U.S. SEC issued new disclosure guidance for crypto asset ETPs, aiming to provide clear instructions on issuance and registration within the framework of federal securities laws, promoting standardized market operations.
The guidance states that crypto asset ETP issuers must fulfill disclosure obligations related to product issuance and registration as required under the U.S. Securities Act and Securities Exchange Act. These include risk factors, business description, service providers for the trust, custody of trust assets, fees and expenses, securities description, distribution plans, management, conflicts of interest, and financial statements.
In the short term, this guidance may suppress the launch of products with insufficient disclosures, prompting investors to reassess risk premiums and potentially leading to outflows from ETP products. In the long run, however, it will accelerate the application and deployment of leading institutional products, reduce regulatory uncertainty and compliance costs, and foster a more mature and orderly crypto asset investment ecosystem.
2.2.2 Exchanges Push for Common Listing Standards for Crypto ETPs
Notably, in addition to taking a critical step forward in ETP operating models, the listing pathway is also expected to see important optimization.
Cboe BZX, Nasdaq, and NYSE Arca, Inc. have jointly submitted a significant rule amendment proposal to the SEC. They propose establishing common listing and trading standards for commodity trust shares, aiming to expedite the public trading approval process for such products. Under current rules, exchanges must file Form 19b-4, triggering a review period of up to 240 days. The proposed framework would shorten this timeline and institutionalize and standardize the "one coin, one review" listing process. This would greatly simplify listings, lower issuance costs, and open an efficient, transparent listing channel for commodity ETPs including crypto assets.
3. Industry Significance of In-Kind Creation and Redemption
3.1 Mechanism Comparison: In-Kind vs. Cash Creation and Redemption
Prior to this approval, spot Bitcoin and Ethereum ETPs in the U.S. market were required to use cash creation and redemption. This meant that when authorized participants (typically traditional giants like Goldman Sachs and JPMorgan Chase or specialized market makers) created ETP shares, they had to deliver cash to the issuer, who would then purchase Bitcoin or Ethereum in the spot market. During redemptions, the issuer had to first sell the crypto assets to convert them into cash before delivering the proceeds to the authorized participant.
In contrast, the in-kind creation and redemption model allows authorized participants to directly deliver actual Bitcoin or Ethereum to the ETP issuer in exchange for newly created shares. Upon redemption, the ETP issuer can directly transfer the corresponding crypto assets back to the authorized participant. As a result, the issuer does not need to manage large flows of cash and crypto assets and avoids complex buy/sell operations within short timeframes.
3.2 Positive Impacts on the Crypto Market
In-kind creation and redemption offer 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 buying and selling of crypto assets, resulting in accumulated trading fees and slippage during large trades. Applying in-kind creation and redemption to crypto ETPs reduces transaction friction and provides greater flexibility for issuers and market makers.
(2) Tax Burden: According to IRS regulations, when converting cryptocurrency into fiat currency involving capital gains tax, investors must calculate capital gains or losses by subtracting their cost basis from the sale price and pay corresponding capital gains taxes. Cash creation and redemption involve the buying and selling of crypto assets, increasing tax complexity and potentially triggering capital gains tax liabilities, which are often ultimately passed on to investors. The in-kind model allows investors to defer the realization of capital gains until they sell, offering more flexible tax planning opportunities.
(3) Pricing Efficiency: Cash creation and redemption can cause discrepancies between an ETP’s market price and its net asset value (NAV), especially during periods of high market volatility, leading to premiums or discounts. Frequent cash creations and redemptions may force issuers to frequently adjust their portfolios, causing price fluctuations in the ETP. In contrast, in-kind creation and redemption help maintain alignment between ETP prices and NAV, improve pricing efficiency, and ensure fairness and transparency in trading prices.
(4) Market Liquidity: Traditional equity and ETP markets commonly use in-kind creation and redemption. Aligning crypto asset ETPs with this mechanism places them on equal operational footing with traditional commodity ETPs, expanding the accessibility and scope of crypto derivative financial products and encouraging traditional institutional investors to allocate capital into the crypto sector.
As Bloomberg analyst James Seyffart pointed out, by approving in-kind creation and redemption for Bitcoin and Ethereum ETFs, the SEC has paved the way for similar mechanisms for future altcoin ETFs (e.g., based on Solana, XRP, etc.).
4. Conclusion
The SEC’s first approval of in-kind creation and redemption for crypto asset ETPs adds another key milestone to the institutional development of crypto financial markets. This mechanism brings the circulation logic of crypto assets closer to that of traditional ETFs and provides a mature path for compliant institutional capital entry.
At the same time, regulators are accelerating improvements in supporting systems. The SEC’s recently released disclosure guidance for crypto asset ETPs, for the first time under the federal securities law framework, clarifies registration and disclosure requirements for these products, offering clearer compliance references for issuers and investors.
Developments at the exchange level are equally noteworthy. Cboe BZX, Nasdaq, and NYSE Arca have submitted a rule change proposal to the SEC aiming to establish common listing standards for commodity trust shares to streamline the listing and approval process for crypto ETPs. If implemented, this reform could resolve longstanding issues of "difficult queuing and slow approvals," significantly improving market efficiency and transparency.
Overall, whether it’s the introduction of in-kind creation and redemption at the operational level or new disclosure rules at the policy level, both point toward a clear trend: crypto assets are rapidly advancing into a phase of clearer regulation, supervisability, allocatability, and deep integration with traditional financial operating logic. Market sentiment is shifting from defensive positioning against regulation to proactive adoption, and from speculation-driven activity toward value-based allocation. Future competition may no longer center solely on product design, but rather on who can best balance compliance and risk management to build robust and sustainable crypto asset investment systems.
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