The SEC has invited public comments on a proposed rule change that would allow Bitcoin (BTC) and Ether (ETH) exchange-traded funds (ETFs) to conduct in-kind redemptions, a move that could significantly alter institutional participation in cryptocurrency investment.
The proposal, filed by the Cboe BZX Exchange on February 10, seeks to enable in-kind transactions for the ARK 21Shares Bitcoin ETF (ARKB) and the 21Shares Core Ethereum ETF (CETH), a shift from the current cash-based system.
A Potential Shift for Crypto ETFs
The SEC’s willingness to consider in-kind transactions represents a potentially transformative step for cryptocurrency ETFs. Under the current structure, ETF issuers are required to use cash when creating and redeeming shares, which can lead to higher tax liabilities and inefficiencies for investors.
If approved, in-kind transactions would allow authorized participants to exchange ETF shares directly for a proportional basket of the underlying assets—Bitcoin and Ether—without triggering taxable events.
Proponents argue that this approach would enhance liquidity and tax efficiency, making these funds more attractive to institutional investors. “In-kind redemption mechanisms could enhance liquidity and appeal for investors looking to optimize their tax positions while investing in digital assets,” noted COINOTAG, a cryptocurrency news outlet.
This discussion comes at a time of increased activity in the crypto ETF space. Nasdaq recently sought approval for in-kind redemptions for BlackRock’s iShares Bitcoin Trust (IBIT), currently the largest crypto ETF by assets under management (AUM), which recently reached approximately $57 billion. By contrast, ARKB and CETH have AUMs of around $5 billion and $20 million, respectively.
Regulatory Climate and Market Response
The SEC’s approach to crypto ETFs has evolved significantly over the past year, reflecting growing institutional interest in digital assets. The agency has been under pressure to allow in-kind redemptions, particularly as major asset managers expand their crypto offerings. Market observers believe that such a move could mark a shift in regulatory stance, potentially opening the door to broader acceptance of digital asset funds.
Jame Seyffart Has Released Odds on Spot Crypto ETFs Approvals. Source: James on X
Industry analysts, including Bloomberg Intelligence’s James Seyffart, have been closely monitoring the SEC’s deliberations.
In a recent social media post, Seyffart suggested that the agency is likely to approve multiple spot crypto ETFs in the near future, pointing to increased filings for funds that include Solana (SOL), XRP (XRP), and Litecoin (LTC). “We’re putting out relatively high odds of approval across the board,” he noted in a post alongside fellow analyst Eric Balchunas.
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