For years, crypto asset managers have been asking the U.S. Securities and Exchange Commission (SEC) for one
seemingly nerdy change: “Let us run our crypto exchange-traded products (ETPs) the same way regular ETFs work
with in-kind creations and redemptions.” In July 2025, that wish finally came true.
Don’t let the jargon scare you off. This policy shift might sound like it only matters to lawyers, traders, and
people who think spreadsheets are a love language. But in reality, approving in-kind creation and redemption for
crypto ETPs has real implications for spreads, taxes, liquidity, and even which new crypto products may hit the
market next. It’s one of those quietly huge changes that makes the whole ecosystem feel more “grown up.”
In this article, we’ll break down what the SEC actually approved, why in-kind mechanics are such a big deal, who
stands to benefit, and what retail investors should watch as the next wave of crypto ETPs rolls in.
Quick Refresher: What Are Crypto ETPs and How Do ETFs Work?
ETPs 101 (With a Crypto Twist)
An exchange-traded product (ETP) is a security that trades on an exchange, much like a stock, but typically tracks
an underlying asset or basket of assets think commodities, bond indexes, or in this case, cryptocurrencies.
Crypto ETPs give investors exposure to assets like Bitcoin and Ether in a brokerage account without having to run
their own wallet, manage private keys, or stress about sending funds to the wrong address.
These crypto products generally mirror the structure of commodity or precious-metals ETPs: a trust or similar
vehicle holds the underlying asset (e.g., BTC, ETH), and shares of that vehicle trade intraday on exchanges like
NYSE Arca, Nasdaq, or Cboe.
The Creation & Redemption Engine Under the Hood
What keeps an ETF or ETP trading close to the value of the assets it holds (its net asset value, or NAV) is the
creation and redemption mechanism. This process lives in the “primary market” and involves a small group of large
institutions called authorized participants (APs).
In simplified terms:
-
Creation: When there’s strong demand for an ETP, an AP delivers a predefined “basket” of assets
(or cash) to the issuer. In exchange, it receives a large block of ETP shares (a creation unit) that it can then
sell on the exchange. -
Redemption: When there’s excess supply, an AP buys shares on the exchange and returns them to
the issuer in exchange for either the underlying assets or cash.
This arbitrage mechanic helps keep the ETP’s market price close to its NAV and underpins ETF liquidity. When APs
can transact efficiently, spreads tend to tighten and the product behaves more like the asset it tracks.
Cash vs. In-Kind: Why the SEC’s Change Matters
What Is “In-Kind” Creation & Redemption?
In a cash creation model, APs deliver dollars to the issuer, which then buys the crypto on the
market. For redemptions, the issuer sells crypto and hands cash back to the AP.
In an in-kind model, the AP delivers the actual underlying crypto (like BTC or ETH) to create new
shares and receives that crypto back when redeeming shares. No intermediate buy-or-sell step by the issuer is
required.
For traditional equity and commodity ETFs, in-kind is the norm it’s a major reason those products are so
cost-efficient and tax-efficient.
How Crypto ETPs Were Different Until Now
When the SEC first approved spot Bitcoin and later Ether-based products, it insisted on cash-only
creations and redemptions. Issuers had to receive cash, go out into the market, buy the crypto, and then reverse
the process for redemptions.
Regulators worried about custody risks, market manipulation, and operational complexity if APs were moving crypto
around directly. The result: ETPs worked, but with more friction than traditional in-kind ETFs.
What the SEC Just Approved
On July 29–30, 2025, the SEC issued orders and related guidance allowing in-kind creations and
redemptions for crypto-asset ETPs. APs can now deliver or receive crypto directly in exchange for shares,
rather than routing everything through cash.
Key points of the new framework include:
-
The approval applies to crypto ETPs that are not registered investment companies, such as spot Bitcoin and Ether
grantor trusts. -
Exchanges like Nasdaq, Cboe BZX, and NYSE Arca received accelerated approval of rule changes supporting the new
structure. -
Issuers with robust crypto custody and risk controls can now operate in a way that resembles gold or other
commodity ETPs.
Some asset managers, like Bitwise, have already announced that their Bitcoin and Ether ETPs will move to in-kind
flows, citing potential for tighter spreads and better tax outcomes.
Why In-Kind Crypto ETPs Are a Big Deal
1. Lower Transaction Costs and Tighter Spreads
Under cash-only models, every creation or redemption forced the issuer to trade crypto in the open market. That
meant:
- Trading fees and slippage for the issuer
- Operational overhead to manage orders and settlement
- Potentially wider spreads when markets were volatile
With in-kind flows, APs that already have deep access to liquidity can deliver crypto directly. No extra buy or
sell step by the issuer is required, reducing costs and smoothing out the primary-market plumbing. Academic and
market analyses of ETFs have long shown that in-kind structures generally produce tighter tracking and more stable
spreads than cash-only models and crypto is expected to follow the same pattern.
2. Improved Tax Efficiency
In-kind redemptions also help limit realized capital gains inside the fund. When an issuer can deliver appreciated
crypto to an AP instead of selling it for cash, it avoids crystallizing gains that might otherwise be passed
through to shareholders.
This kind of tax efficiency is one of the signature advantages of ETFs in equities and fixed income, and law-firm
commentary suggests the SEC’s move is designed to put crypto ETPs on more comparable footing.
3. Better Alignment with Commodity ETP Norms
For years, issuers argued that if a gold ETF can operate with in-kind baskets of gold, a Bitcoin ETP should be
able to operate with Bitcoin. The new orders largely embrace that logic, acknowledging that the market’s custody
and risk controls have matured enough to support similar treatment.
From a regulatory-philosophy standpoint, this is a significant shift: crypto ETPs are no longer treated as
permanent “special cases” that must always use the most restrictive plumbing available.
Who Benefits From the New Rules?
Authorized Participants and Market Makers
APs and market makers were some of the loudest voices pushing for in-kind flows. They already live in both worlds
traditional finance and deep crypto liquidity venues. For them, having to go through cash-only creations was
like being forced to take a long detour on a road they drive every day.
In-kind flows let them:
- Reuse crypto inventory more efficiently
- Reduce FX and funding costs tied to moving in and out of dollars
- Respond more quickly to arbitrage opportunities across ETPs, futures, and spot markets
Issuers and Asset Managers
Issuers gain cleaner operations: fewer forced trades, less market impact, and more predictable flows. Several law
firms have noted that in-kind baskets may be easier to standardize and scale across multiple products, especially
as exchanges move toward generic listing standards for commodity-based ETPs.
For asset managers, this opens the door to more exotic baskets such as diversified crypto indexes that would
be much more cumbersome to maintain with cash-only flows.
Institutional and Retail Investors
If the plumbing works better, investors should feel it indirectly through:
- Potentially tighter bid–ask spreads
- Less tracking error versus the underlying crypto
- More product choice beyond “just Bitcoin and Ether”
Retail investors won’t see “in-kind” buttons in their brokerage apps, but they benefit from more efficient
products and a broader menu of regulated options.
Risks and Challenges That Haven’t Gone Away
Crypto Custody and Operational Complexity
In-kind flows mean more crypto is moving between APs, custodians, and ETP issuers. That raises the stakes for:
- Institutional-grade custody with multi-layer security controls
- Robust private key management and access policies
- Resilient operational processes for deposits and withdrawals
The SEC’s approval does not mean it suddenly considers crypto risk-free. Instead, it indicates regulators are more
comfortable with the way large institutions are addressing those risks but those controls must remain tight to
keep trust in the system.
Market Structure and Liquidity Shocks
Crypto markets are still capable of sudden, sharp moves. In a stressed environment say, a rapid 20–30% intraday
drawdown in-kind flows could introduce bottlenecks if networks are congested or key trading venues suffer
outages.
Regulators and exchanges have stressed the need for robust liquidity and surveillance frameworks, as well as
fallback procedures in volatile conditions. But investors should remember: a more efficient product is not the
same thing as a less volatile underlying asset.
Regulatory Expectations Are Still High
The SEC’s approval of in-kind flows comes alongside broader moves to standardize and streamline listing rules for
commodity-based and crypto ETPs. Exchanges have received permission to adopt generic listing standards for many
spot products, shortening approval timelines and enabling a wave of new ETFs.
But with that flexibility comes scrutiny. Issuers are expected to maintain strong disclosures, surveillance
sharing, and ongoing risk management especially as new tokens and multi-asset baskets join the lineup.
What This Means for the Future of Crypto ETPs
In-kind approval doesn’t just tune up today’s Bitcoin and Ether ETPs; it sets the stage for tomorrow’s products.
-
More asset variety: With generic listing standards and in-kind mechanics, it becomes easier to
launch ETPs tied to other major tokens with regulated futures markets and sufficient liquidity. -
Smarter index products: Multi-asset crypto index ETPs become more efficient when issuers can
rebalance and manage baskets using in-kind flows. -
Fee and spread competition: As operational frictions drop, issuers will likely compete more
aggressively on management fees and secondary-market performance.
Put simply, the policy shift helps crypto ETPs look and behave more like the ETF products investors already know
and that familiarity is a powerful accelerant for adoption.
How Investors Can Navigate the New Landscape
You don’t need to be an AP or a lawyer to make use of this development, but it helps to know what to look for when
you compare products.
-
Read the structure section of the prospectus. Check whether the ETP uses in-kind, cash-only, or
a hybrid model. This can affect costs, tax treatment, and how the fund behaves during volatile markets. -
Watch bid–ask spreads and trading volume. Over time, in-kind-enabled products may show tighter
spreads and stronger volume, especially in active markets. -
Consider your tax situation. While in-kind flows can reduce fund-level capital gains, your own
tax outcome still depends on how long you hold, your jurisdiction, and your overall portfolio. -
Don’t forget the underlying risk. Even the most efficient ETP can’t make Bitcoin or Ether less
volatile. Treat these products as tools, not magic volatility erasers.
Experiences and Lessons from the In-Kind Era
To really understand how this change plays out, it helps to imagine how different players experience the new
in-kind world from inside the trading desk to your brokerage app.
The Issuer: From “Fire Drill” to “Standard Operating Procedure”
Before in-kind approval, a busy day for a crypto ETP issuer could feel like a series of micro fire drills. An AP
would request a large creation in the morning; the issuer’s portfolio team would then scramble to source tens or
hundreds of millions of dollars’ worth of Bitcoin or Ether as efficiently as possible, trying not to move the
market or tip their hand to other traders.
With in-kind flows, much of that drama moves off the issuer’s plate. The AP can show up with the crypto already
sourced from OTC desks, derivatives markets, or spot venues. The issuer’s job becomes more about verifying
delivery, managing custody, and ensuring the basket matches the fund’s mandate. It’s still complex, but it’s much
closer to the routine mechanics used in major equity and bond ETFs.
The AP: Turning Inventory into an Edge
For an AP that already trades crypto, in-kind flows unlock new ways to monetize its inventory and market insight.
Suppose the desk sees that Bitcoin ETP shares are trading at a small premium to NAV while it can cheaply source
BTC in offshore spot markets. With in-kind creation, the AP can:
- Buy BTC where it’s cheapest.
- Deliver that BTC to the issuer in exchange for new ETP shares.
- Sell those shares in the U.S. market, capturing the spread.
The result: the premium collapses, the ETP’s price moves back toward NAV, and the AP books a profit. Investors get
more accurate pricing, and the AP has turned its ability to move crypto efficiently into a structural advantage.
The RIA: A More “Normal” Product to Put in Portfolios
Registered investment advisors (RIAs) often want crypto exposure for clients but need products that behave
predictably inside model portfolios. Cash-only redemptions made some RIAs nervous would tracking error blow out
during stress, or would forced selling of crypto inside the fund generate taxable events?
The in-kind model doesn’t remove all risk, but it does make the structure feel more familiar. RIAs can compare
these products to gold or commodity ETPs they’ve used for years, rather than explaining why a Bitcoin ETP has
special, more limited plumbing. That familiarity makes it easier to justify a small, carefully sized crypto
allocation as part of a diversified, long-term strategy.
The Individual Investor: Better Tools, Same Responsibility
For a retail investor, the experience is subtler. Your brokerage interface still shows a ticker, a price, a chart,
and maybe a risk disclosure in all caps. You won’t see “now with in-kind redemptions!” flashing in neon on your
screen.
But over time, you might notice that spreads stay tight even on busy days, that products track their underlying
assets more closely, and that more choices appear from single-asset funds to diversified crypto baskets. The
tools get better, even if your responsibility stays the same: understand what you own, size positions appropriately,
and be honest about your own risk tolerance.
The Big Lesson: Market Structure Matters
The in-kind approval for crypto ETPs is a reminder that “how” a product works is just as important as “what” it
holds. Creation and redemption mechanics, custody choices, and listing standards may feel like boring footnotes,
but they quietly shape everything from investor costs to market stability.
If you’re serious about investing in crypto through ETPs, treating these details as part of your due diligence
instead of fine print to skip can give you a real edge. And as regulators and issuers keep tuning the machinery,
we’re likely to see crypto ETPs continue evolving from experimental niche tools into mainstream portfolio building
blocks.
Conclusion: A Milestone for Crypto Market Maturity
The SEC’s approval of in-kind creation and redemption for crypto ETPs is more than an operational tweak. It’s a
milestone that brings crypto products closer to the standards, efficiencies, and expectations of the broader ETF
universe.
For issuers and APs, it means cleaner, cheaper, and more flexible primary-market operations. For investors, it
means better-structured products, likely tighter spreads, and a wider range of choices. For regulators, it’s a
sign that crypto infrastructure has matured enough to merit treatment similar to other commodities even if the
underlying assets remain volatile and complex.
In other words: the pipes just got a lot better. What you choose to run through them is still up to you.
