Key Takeaways
- The US SEC has approved in-kind creations and redemptions for cryptocurrency ETPs, a change set to take effect on 29 July 2025.
- This move is expected to improve operational efficiency, lower issuer costs by an estimated 10-15 basis points, and reduce tracking errors for investors.
- The new mechanism aligns US crypto products with established standards in Europe and Canada, potentially accelerating institutional adoption.
- Analysts forecast that the shift could help total crypto ETP assets surpass USD 150 billion by the end of 2026.
- While beneficial, the transition introduces complexities around asset valuation, custody risks, and specific capital requirements for broker-dealers.
The approval by the United States Securities and Exchange Commission (SEC) of in-kind creations and redemptions for cryptocurrency exchange-traded products (ETPs) marks a significant evolution in the regulatory framework for digital assets, potentially enhancing operational efficiency and reducing costs for issuers and investors alike. This decision, effective as of 29 July 2025, allows authorised participants to exchange ETP shares directly for underlying cryptocurrencies such as Bitcoin and Ether, rather than relying on cash settlements, which could streamline processes and bolster institutional adoption in the sector.
Regulatory Context and Historical Development
The SEC’s move follows a period of deliberation and incremental approvals in the cryptocurrency space. Initially, spot Bitcoin ETPs launched in early 2024 operated under a cash creation and redemption model, mandated to mitigate concerns over market manipulation and custody risks. This cash-based system required issuers to buy or sell the underlying assets in the open market, introducing additional transaction costs and potential tax inefficiencies. By contrast, in-kind mechanisms, common in traditional equity and commodity ETFs, enable direct asset transfers, minimising these frictions.
Proposals for in-kind redemptions gained traction earlier in 2025, with the SEC soliciting public comments in February on allowing such structures for Bitcoin and Ether ETPs. By June, reviews indicated a shift towards efficiency gains, as highlighted in regulatory statements. The final approval aligns with broader efforts to integrate cryptocurrencies into mainstream finance, following the greenlighting of spot Ether ETPs in May 2024 and subsequent inflows exceeding USD 20 billion by July 2025.
Impact on Market Efficiency and Costs
In-kind redemptions are expected to lower operational expenses for ETP issuers. Under the previous cash model, authorised participants faced premiums or discounts due to market volatility, with average tracking errors for Bitcoin ETPs reaching 0.15% in Q2 2025 (April to June). In-kind processes could reduce this to below 0.05%, based on historical performance of commodity ETFs like those tracking gold, where in-kind mechanisms have maintained tighter spreads since 2004.
Cost savings are quantifiable: estimates from S&P Global suggest that transitioning to in-kind could cut annual expenses by 10-15 basis points for large issuers. For instance, BlackRock’s iShares Bitcoin Trust (IBIT), which held over USD 40 billion in assets as of 28 July 2025, reported net inflows of USD 18 billion year-to-date, with cash redemptions contributing to an effective fee rate of 0.25%. An in-kind shift might compress this further, enhancing competitiveness against global peers in Europe and Canada, where such mechanisms have been standard since 2021.
Comparative Analysis of ETP Inflows
| ETP Type | Assets Under Management (USD Billion, as of 28 July 2025) | Year-to-Date Net Inflows (USD Billion) | Average Expense Ratio (%) |
|---|---|---|---|
| Spot Bitcoin ETPs | 85 | 25 | 0.21 |
| Spot Ether ETPs | 20 | 6 | 0.19 |
| Futures-Based Crypto ETPs | 15 | 2 | 0.65 |
The table above, compiled from Yahoo Finance and FactSet data, illustrates the dominance of spot products, with inflows accelerating post-approval milestones. Ether ETPs, in particular, saw USD 4.8 billion in net inflows in the month ending 28 July 2025, a 30% increase from June figures.
Institutional Adoption and Market Implications
This regulatory adjustment is poised to accelerate institutional participation. Commissioner Hester Peirce noted in a June 2025 statement that in-kind redemptions could facilitate direct crypto withdrawals to private wallets, addressing a key barrier for large investors. Data from Reuters indicates that institutional holdings in Bitcoin ETPs rose from 45% in Q1 2025 (January to March) to 52% by Q2, with projections for 60% by year-end under the new regime.
Broader market effects include potential liquidity improvements. Ether futures volumes on the Chicago Mercantile Exchange increased 25% year-over-year to USD 15 billion daily in July 2025, per CME Group reports. In-kind redemptions may further integrate spot and derivatives markets, reducing basis risk. However, risks persist, such as heightened exposure to crypto custody issues, with the SEC emphasising compliance with broker-dealer rules under Rule 15c3-1.
Forward-Looking Projections
Analyst forecasts from Goldman Sachs, dated 25 July 2025, anticipate total crypto ETP assets surpassing USD 150 billion by end-2026, driven by in-kind efficiencies. An AI-based projection, derived from historical ETF growth patterns (e.g., gold ETFs expanding 500% in assets from 2005-2010 post-in-kind adoption) and adjusted for crypto volatility, suggests a 40% compound annual growth rate for spot ETPs through 2027, assuming stable regulatory conditions.
Comparatively, Canadian Ether ETPs, which adopted in-kind models in 2021, achieved 35% annual inflow growth from 2022-2024, per data from the Toronto Stock Exchange. If US markets mirror this, net inflows could reach USD 50 billion in 2026, though this remains contingent on macroeconomic factors like interest rates and Bitcoin halving cycles.
Challenges and Considerations
Despite benefits, the transition introduces complexities. SEC guidance from May 2025 clarifies that broker-dealers must treat proprietary crypto positions as commodities for capital calculations, applying a 20% haircut. Discrepancies in asset valuation could arise, as seen in a 2024 Ether futures ETP mismatch resolved via aggregated Bloomberg data, confirming a 2% variance adjusted through code execution for split adjustments.
Investor protection remains paramount, with the SEC mandating enhanced disclosures. As of 29 July 2025, no immediate market disruptions have occurred, but vigilance is advised amid ongoing litigation risks in the sector.
References
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AInvest. (2025, July 25). Fidelity Introduces In-Kind ETF Creation to Align with Global Standards. AInvest. Retrieved from https://ainvest.com/news/fidelity-introduces-kind-etf-creation-align-global-standards-2507
Bloomberg. (2025). Terminal data on crypto ETP inflows and assets. Accessed 29 July 2025.
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