SEC Greenlights In-Kind Creations for Crypto Exchange-Traded Products
The U.S. Securities and Exchange Commission (SEC) has taken a pivotal step by approving in-kind creations and redemptions for Bitcoin and crypto exchange-traded products (ETPs) as of July 29. This significant change reverses the previous cash-only limitations that were in place for the launch of spot Bitcoin ETPs earlier this year. The approval now aligns these products with the mechanisms traditionally employed by commodity ETPs, such as gold.
Impact of In-Kind Redemptions on the Bitcoin ETF Sector
The SEC’s decision marks a major shift in policy, with Chairman Paul S. Atkins describing it as a “new day at the SEC.” He emphasized that this change is likely to make these financial products more efficient and cost-effective. Eric Balchunas, a senior ETF analyst at Bloomberg Intelligence, took to social media to highlight the policy shift, noting that it allows authorized participants (APs) to deliver or receive Bitcoin and Ethereum directly. This eliminates the need to route cash through issuers for buying or selling the underlying assets on the open market.
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Understanding the Technical Shift with In-Kind Models
Bitwise President Teddy Fusaro elaborated on the implications of this shift, explaining that it eradicates the recurring frictions inherent in the cash-creation model. Traditionally, ETFs facing inflows would need to purchase Bitcoin from the market, incurring at least some spread relative to the benchmark price. For instance, Fusaro illustrated a scenario where a $100 million purchase incurs a two-basis-point premium to the CME CF Bitcoin Reference Rate, equating to a $20,000 cost. These costs are ultimately passed down to the end shareholder through slightly inflated share prices. With the in-kind model, the AP delivers the necessary Bitcoin directly, thereby removing this cost from the equation.
The Mechanics Behind In-Kind Creations
Though the process may seem complex to casual investors, it is familiar territory for ETF practitioners. In the primary market, APs assemble creation units and exchange them for ETF shares. Previously, in a cash-only setup, issuers or their agents had to procure Bitcoin at benchmark prices, which included execution costs. The BRRNY index provides a pricing window from 3 p.m. to 4 p.m. New York time, but actual market transactions often involve spreads and market impacts. The in-kind model directly substitutes Bitcoin for cash, allowing APs to manage their inventory more efficiently without forcing funds to trade.
Broader Implications and Future Prospects
The SEC’s orders extend beyond a simple operational change. The Commission has also approved other measures that promote a neutral approach to crypto ETPs. These include permitting exchange applications to list and trade ETPs containing both spot Bitcoin and Ethereum, options on certain Bitcoin ETPs, and increasing listed options position limits to the standard ceilings for some Bitcoin ETP options. The agency has also initiated a process to gather public comments on delegating approvals for listing large-cap crypto ETPs.
Market Structure and Operational Adjustments
According to Commissioner Mark T. Uyeda, this move corrects a previous policy anomaly. Before July 29, crypto ETPs were restricted from using in-kind creations and redemptions, unlike other commodity ETPs. This constraint resulted in unnecessary costs and burdens, as highlighted by Fusaro. The new policy allows ETF market-makers and APs to operate more efficiently, similar to gold and other commodity funds. This change is expected to sharpen the arbitrage that keeps ETF prices close to their net asset value, especially during volatile trading sessions.
Implementation and Market Response
The speed at which issuers adopt these changes will vary, as AP agreements, operations, and custody systems need updating to support in-kind flows. However, the policy shift is already influencing the market landscape. As of the time of this report, Bitcoin was trading at $118,527, reflecting the dynamic nature of the crypto market.
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