The U.S. Securities and Exchange Commission (SEC) has officially approved a long-awaited rule change - authorized participants in Bitcoin and Ethereum exchange-traded funds (ETFs) can now create and redeem shares using the underlying cryptocurrencies themselves, instead of cash. That means for the first time, institutional traders can move actual BTC and ETH in and out of these ETFs, exchanging them directly for shares, like with gold or other commodity-backed ETFs.

Image Source: Paul Atkins

What Does This Mean for the Market?

This move, known as “in-kind” creation and redemption, fundamentally modernizes how crypto ETFs work under U.S. law, making them more efficient, cost-effective, and, importantly, more appealing to big institutional players. Before this, ETF participants had to convert crypto to cash when creating or redeeming ETF shares. That not only added friction and costs but also introduced tax consequences and operational bottlenecks, limiting the growth and attractiveness of crypto ETFs on Wall Street.

With in-kind transactions now officially approved, institutional traders and ETF issuers can skip the back-and-forth fiat conversions and move actual Bitcoin or Ethereum in and out as needed. The change is expected to further tighten the spread between ETF prices and their crypto net asset value, reduce capital gains tax triggers for market makers, and make arbitrage and liquidity provision both easier and cheaper.

SEC Embraces a Modern Regulatory Touch

The shift was announced under the leadership of new SEC Chair Paul Atkins, who has publicly committed to a “fit-for-purpose” regulatory environment for digital assets. “It’s a new day at the SEC,” Atkins declared in the official statement. “Investors will benefit from these approvals, as they will make these products less costly and more efficient.” Under his tenure, the Commission has become noticeably more open to crypto market innovation, reflecting growing institutional demand and changes in Congressional sentiment.

Why Does It Matter?

For large scale asset managers and firms like BlackRock, Fidelity, and Ark Invest had been lobbying for this step since spot Bitcoin ETFs got the first nod in January 2024. With the ability to handle in-kind transfers, trading desks can now build and unwind large ETF positions without sparking taxable events or navigating cumbersome conversions.

Authorized participants will see operations become smoother and more transparent. For individual investors, it means the ETFs they own are more closely tied to the real assets underneath. Arguably, it’s a giant leap toward putting crypto ETFs on the same playing field as the gold funds that many in the finance world already know and trust.

What’s Next?

Analysts expect this change to spark a new surge in crypto ETF trading volumes and institutional participation. The SEC also approved an increase in position limits for Bitcoin ETF options to 250,000 contracts, granting even greater flexibility for sophisticated strategies. With these building blocks in place, the industry is already buzzing about the potential for altcoin ETFs and even more sophisticated crypto-backed financial products down the line.

Final Thoughts

For the crypto faithful and the Wall Street crowd, this SEC decision marks a historic turning point. By allowing direct use of Bitcoin and Ethereum for ETF share creation and redemption, regulators have opened the door wider than ever before for digital assets to take their place in the portfolios of mainstream investors, retirement plans, and institutional treasuries.