Wall Street Set to Benefit as In-Kind Crypto ETF Redemptions Gain Momentum

Recent developments suggest positive movements in in-kind creations for crypto ETFs (exchange-traded funds) after major providers filed amendments.

The US SEC (Securities and Exchange Commission) initially approved cash redemptions for Bitcoin and Ethereum ETFs.

Wall Street Set to Benefit as SEC Inches Closer to In-Kind Crypto ETF Approval

Major providers filed amendments for in-kind creations and redemptions for their Bitcoin and Ethereum ETFs. They seek to transition from the current mode, where customers give the issuer cash for new ETF shares, and then the issuer buys Bitcoin.

Instead, issuers or providers want customers to give them BTC or ETH in exchange for the ETF shares.

According to Bloomberg’s ETF analyst, James Seyffart, this is a positive signal suggesting progress in the evaluation.

> “More positive signs regarding Bitcoin & Ethereum ETFs obtaining the ability to do in-kind creation and redemption; 5 different funds on CBOE filed amendments with the SEC. This indicates to me that there is positive movement and likely fine-tuning happening with the SEC,” wrote Seyffart.

If approved, ETFs could start processing creations and redemptions using actual crypto assets instead of cash. This move would boost efficiency, aligning crypto ETFs with traditional ETP (exchange-traded product) structures.

The five comprise Ark 21Shares, Fidelity, Invesco Galaxy, VanEck, and WisdomTree. The rollout of these ETF amendments from heavyweights suggests that institutional money may be eager to enter.

Notably, during the initial race for Bitcoin ETFs, the referee, the US SEC, decided cash creations were the way to go, rather than in-kind (crypto) redemptions.

However, there is a general preference for in-kind creations, called crypto redemptions, with regions like Hong Kong pushing for a fast-mover advantage over the US from the beginning.

Despite initial interest from issuers, they prioritized approval over their preferences, settling for cash redemptions to meet SEC demands. At the time, ETF analyst Eric Balchunas resonated with the compromise.

> “Cash creates makes sense, IMO, because broker-dealers can’t deal in Bitcoin, so doing cash creates puts onus on issuers to transact in Bitcoin and keeps broker-dealers from having to use unregistered subsidiaries or third-party firms to deal with the BTC. Less limitations for them overall,” he said.

Why the SEC went for cash-creates

In hindsight, the SEC’s preference for cash redemptions followed money laundering concerns. With this choice, only issuers would handle Bitcoin, keeping intermediaries such as unregistered broker-dealers away.

> “SEC worried about ETFs being used as a vehicle for money laundering,” explained Charles Gasparino, senior correspondent with Fox Business News.

Additionally, cash redemptions shift Bitcoin trades to issuers, since the SEC blocks brokers from trading spot BTC ETFs directly.

Retail Locked Out with In-Kind Crypto ETF Access Limited to Wall Street Firms

However, a concern arises with retailers now finding themselves locked out.

> “Would this imply retail have a way to redeem in kind? Guessing brokers would have to support the physical,” remarked one user in a post.

According to Seyffart, retail investors must not get excited about the perceived adoption of in-kind creations. He says the change would benefit the authorized participants (APs), suggesting Wall Street firms and potentially even market makers.

This means only large institutions will be able to trade ETF shares directly for the underlying crypto assets. Against this backdrop, Seyffart says most customers will not see a significant difference, given that crypto ETFs already trade with tight spreads.

> “…the vast majority of people won’t even see a difference because the products on the market now already trade extremely efficiently. This will treat crypto ETPs the same as other ETPs are treated,” he noted.

Notwithstanding, there is still cause for optimism with the ETF analyst anticipating deposits and withdrawals for actual tokens, like BTC or ETH, with issuers, but in the distant future.

> “This already exists for some Gold ETFs,” Seyffart revealed.

For now, issuers or providers see in-kind redemptions as a prospective upgrade for institutional players, potentially laying the ground for broader retail access.