Bitcoin ETF Revolution: SEC Greenlights In-Kind Redemptions, Lowering Costs and Increasing Efficiency
📌 Understanding the SEC's Landmark Decision on Bitcoin ETFs
⚖️ On July 29, 2025, the US Securities and Exchange Commission (SEC) fundamentally altered the landscape for Bitcoin and crypto exchange-traded products (ETPs) by approving in-kind creations and redemptions.
This pivotal decision reverses the previous cash-only restriction that governed the initial spot Bitcoin ETF launches in January 2025 and the subsequent Ether fund launches. In a formal statement, the SEC indicated that Bitcoin and Ether ETPs "will be permitted to create and redeem shares on an in-kind basis," bringing them in line with the established mechanics used by commodity ETPs for years.
⚖️ “It’s a new day at the SEC,” proclaimed Chair Paul S. Atkins, emphasizing the change should render these products “less costly and more efficient.”
A Shift in Policy: What Does "In-Kind" Mean?
Bloomberg Intelligence senior ETF analyst Eric Balchunas highlighted the significance of this policy shift, posting Chair Atkins' remarks on X.
The core of the change lies in enabling authorized participants (APs) to directly deliver or receive Bitcoin or Ether, rather than funneling cash through the issuer to buy or sell the underlying assets on the open market. This seemingly technical adjustment has profound implications for cost reduction and market efficiency.
📌 The Importance of In-Kind Redemptions for the Bitcoin ETF Market
Bitwise President Teddy Fusaro provided a technical explanation, emphasizing that this shift will eliminate recurring frictions inherent in the cash-creation model.
Under the cash-creation model, an ETF experiencing inflows must "go out and buy Bitcoin from the market," inevitably paying a spread above the benchmark price. This cost is then passed down the line to the end shareholder.
Illustrative Example of Cost Savings
Fusaro illustrated this with a hypothetical scenario: an ETF paying a two-basis-point premium to the CME CF Bitcoin Reference Rate (New York variant) on a $100 million purchase.
“If the ETF pays .02% above the benchmark price (BRRNY) on a $100 million purchase, that’s $20 [thousand],” Fusaro explained. These costs, he noted, are ultimately borne by the end shareholder through a slightly higher share price. In contrast, with in-kind redemptions, the AP delivers the Bitcoin directly "without the .02% slippage," effectively removing that cost.
The Mechanics Behind the Savings
The process involves APs assembling creation units and exchanging them with the trust for ETF shares.
In a cash-only system, the issuer or its agent must source Bitcoin at observable benchmarks plus execution costs. The BRRNY index, calculated from 3 p.m. to 4 p.m. New York time from trades on vetted exchanges, serves as the pricing anchor. However, even with this benchmark, real-world transactions still incur spreads and market impact.
⚖️ In-kind redemptions replace cash with Bitcoin in this exchange, allowing APs to contribute or receive the asset directly, netting their inventory without forcing the fund to trade on the spot market. This, in turn, tightens secondary-market spreads, reduces tracking noise around the close, and minimizes the hidden costs passed on to investors during heavy creation or redemption periods.
📌 Broader Implications and Additional SEC Actions
⚖️ The SEC's actions extend beyond just operational tweaks.
The Commission also approved exchange applications to list and trade ETPs holding both spot Bitcoin and spot Ether, options on certain spot Bitcoin ETPs, FLEX options on shares of specific BTC-based ETPs, and an increase in listed options position limits (up to 250,000 contracts) for some Bitcoin ETP options. The agency also initiated scheduling orders to solicit comments on delegated approvals to list two large-cap crypto ETPs.
Correcting an Outlier Policy
Commissioner Mark T. Uyeda characterized the move as a necessary correction.
Prior to July 29, crypto ETPs faced a restriction that other commodity ETPs didn't: the inability to use in-kind creations and redemptions. This limitation, he noted, resulted in unnecessary costs and burdens. Uyeda's statement aligns with Fusaro's cost channel analysis and explains why ETF market-makers and APs have advocated for parity with gold and other commodity funds since the debut of spot crypto products.
📌 Market Structure Benefits
From a market-structure standpoint, the implications are tangible.
In-kind mechanisms allow APs to manage Bitcoin inventory across prime brokers, OTC desks, and custodians without forcing the fund to engage in spot market transactions at the close. This strengthens the arbitrage that keeps ETF prices close to their net asset value, particularly during volatile periods when cash creations could force hurried purchases above benchmarks.
This increased efficiency will likely lead to greater adoption and liquidity in the Bitcoin ETF market.
Implementation Timeline
The speed of implementation will vary by issuer, as AP agreements, operations, and custody infrastructure must be updated to support in-kind flows.
However, the policy foundation has fundamentally shifted, promising a more efficient and cost-effective future for Bitcoin ETFs.
At press time, BTC traded at $118,527.
📌 Key Stakeholders' Positions
⚖️ Here’s a table summarizing the key stakeholders and their positions on the SEC's decision:
| Stakeholder |
Position |
Impact on Investors |
| ⚖️ SEC Chair Paul S. Atkins |
📈 Pro- In-Kind redemptions reduce costs and increase efficiency. |
👥 Lower costs for investors. |
| Bitwise President Teddy Fusaro |
In favor: Removes recurring frictions in cash-creation model. |
Potential for better returns. |
| Commissioner Mark T. Uyeda |
Supportive: Corrects an outlier policy harming crypto ETPs. |
💰 Fairer market structure. |
| 💰 ETF Market Makers & APs |
Positive: Parity with commodity funds improves arbitrage. |
Tighter spreads, better pricing. |
📌 🔑 Key Takeaways
- The SEC's approval of in-kind creations and redemptions for Bitcoin ETFs marks a significant shift, aligning them with traditional commodity ETPs. This aims to reduce costs and increase efficiency.
- Authorized Participants (APs) can now directly exchange Bitcoin for ETF shares, bypassing the need for cash transactions on the open market, which lowers costs associated with spreads and market impact.
- This policy change is expected to tighten secondary-market spreads and reduce tracking error, benefiting ETF investors through more accurate pricing and potentially higher returns.
- The SEC’s actions extend beyond Bitcoin ETFs, including approvals for ETPs holding both Bitcoin and Ether, options on Bitcoin ETPs, and increased position limits for Bitcoin ETP options, fostering a more robust crypto investment ecosystem.
- Investors should monitor the implementation speed of in-kind redemptions across different issuers, as updates to AP agreements and custody infrastructure are required.
🔮 Thoughts & Predictions
The SEC’s green light on in-kind redemptions for Bitcoin ETFs is more than a mere technical tweak; it's a watershed moment signaling increasing regulatory acceptance and maturity of the crypto market. This move fundamentally alters the economic dynamics for Bitcoin ETFs and signals the beginning of a new era of integration with traditional financial systems. We can expect a surge in institutional adoption in the medium term, driven by reduced costs and increased efficiency in managing large Bitcoin positions. The parallels with the early days of gold ETFs are striking, suggesting a similar trajectory of growth and price appreciation for Bitcoin as institutional capital flows in. Furthermore, the increased liquidity and tighter spreads will not only attract more investors but also reduce the risk of arbitrage, making these ETFs more attractive as a long-term investment vehicle. Expect BTC price to potentially test $150,000 by year-end due to heightened ETF activity and diminished cost drag, assuming broader market conditions remain favorable.
🎯 Investor Action Tips
- Monitor Bitcoin ETF trading volumes and spreads for signs of increased efficiency and liquidity following the implementation of in-kind redemptions.
- Assess the impact of these changes on the tracking error of your Bitcoin ETF holdings and consider rebalancing your portfolio if significant improvements are observed.
- Explore opportunities to invest in Bitcoin ETFs that have already transitioned to in-kind redemptions, as they may offer more cost-effective exposure to Bitcoin.
- Stay informed about further regulatory developments and potential new crypto ETP listings, as the SEC's evolving approach to crypto assets could unlock additional investment opportunities.
📘 Glossary for Investors
⚖️ Authorized Participants (APs): Financial institutions authorized to create and redeem ETF shares directly with the fund, facilitating market efficiency by managing supply and demand.
⚖️ In-Kind Redemptions: The exchange of underlying assets (like Bitcoin) directly for ETF shares, bypassing cash transactions and reducing associated costs and inefficiencies.
🧭 Context of the Day
The SEC's approval of in-kind redemptions marks a pivotal step toward integrating Bitcoin ETFs into mainstream finance, potentially fueling broader adoption and market maturation.
