SEC Approves In-Kind Redemptions for Spot Bitcoin and Ether ETFs, Paving Way for Greater Efficiency
The U.S. Securities and Exchange Commission (SEC) has officially approved in-kind creation and redemption mechanisms for spot bitcoin and ether exchange-traded funds (ETFs), a structural change expected to improve trading efficiency, reduce volatility, and bring U.S. crypto ETFs in line with global standards.
Previously restricted to cash-based operations, crypto ETF issuers had to convert between fiat and the underlying digital asset during share issuance and redemption. This process added complexity, raised transaction costs, and often caused price swings around net asset value (NAV) calculation times.
With the SEC’s latest move, authorized participants (APs) can now deliver bitcoin or ether directly in exchange for ETF shares—and receive those assets back during redemptions—eliminating the need for intermediary cash transactions.
“This shift brings U.S. ETFs closer to the operational standard used in traditional equity ETFs,” said Laurent Kssis, ETF strategist at CEC Capital. “It removes a major volatility amplifier from the crypto ETF ecosystem.”
Streamlined Process, Lower Volatility
In cash-based models, APs submit funds to the issuer, who then executes large trades in the spot market to buy or sell crypto. This concentrated activity has often led to heightened volatility, especially during high-volume NAV windows.
The in-kind model reduces this friction by enabling asset-for-share swaps without market impact. Kssis noted that in-kind structures have proven successful in Europe, dampening volatility and improving pricing precision.
“This is a structural upgrade that improves how crypto ETFs interact with underlying markets,” he said. “It removes the forced buying and selling that stressed liquidity and destabilized prices.”
Market Implications
According to the New York Digital Investment Group (NYDIG), the new framework is expected to narrow ETF bid-ask spreads, lower tracking errors, and reduce creation/redemption costs. It could also provide tax benefits by limiting capital gains distributions.
The change may also ease secondary market pressure. With redemptions and creations fulfilled directly through crypto, ETF share trading could become less concentrated around NAV recalculations, resulting in smoother price action.
Flaws in the Cash-Based Model
Analysts have long flagged inefficiencies in the cash-only ETF structure. During periods of high redemptions, managers were forced to sell large volumes of crypto—often under pressure—exacerbating price declines and contributing to feedback loops of volatility.
“In-kind models eliminate this liquidity drain,” Kssis explained. “Instead of fire-sale behavior, issuers simply hand back the underlying asset.”
AI-driven financial models support this view, highlighting the improved alignment with NAV and reduced deviation risk under in-kind setups.
