The US SEC approved the application and redemption of encryption ETP in kind, and crypto finance welcomes another benefit

Written by: Fintax  

### 1. Policy Overview and Event Background  

#### 1.1 SEC Policy Overview  

On July 29, 2025, the U.S. Securities and Exchange Commission (SEC) allowed Authorized Participants (APs) to create and redeem shares of crypto asset Exchange-Traded Products (ETPs) in kind. Additionally, the SEC approved a new framework for trading options on spot Bitcoin ETFs, including the introduction of Flexible Exchange Options (FLEX) and customizable derivatives. These instruments grant market participants greater control over contract features such as strike prices, expiration dates, and exercise styles. The SEC also expanded the position limit for Bitcoin ETF options from 25,000 contracts to 250,000 contracts—ten times the original limit. This move marks a significant shift in U.S. securities regulators’ approach to cryptocurrencies, providing greater policy flexibility for ETP issuers, authorized participants, and investors while enhancing trading efficiency and market liquidity.  

#### 1.2 Differences Between Crypto Asset ETPs and Traditional ETFs  

Exchange-Traded Products (ETPs) are investment products listed and traded on national securities exchanges, encompassing Exchange-Traded Funds (ETFs), Exchange-Traded Notes (ETNs), and Exchange-Traded Commodities (ETCs). Crypto asset ETPs are typically structured as trusts, holding assets consisting of spot crypto assets or derivatives pegged to crypto assets. As securities issuers, these trusts register their securities offerings and classes under the Securities Act of 1933 and the Securities Exchange Act of 1934, respectively, and are subject to the anti-fraud provisions of federal securities laws.  

ETFs are registered under the Investment Company Act of 1940. ETF issuers rely on authorized participants to create and redeem ETF shares in exchange for securities or baskets of securities tracked by the ETF. Authorized participants then trade ETF shares on exchanges (i.e., the secondary market).  

Reporting requirements for ETPs differ from those for ETFs. ETPs must file annual audited financial statements (Form 10-K) and quarterly financial statements (Form 10-Q), consistent with requirements for traditional companies listed on U.S. securities exchanges. In contrast, while ETFs also file annual audited financial statements (Form N-CSR), they are only required to submit additional semi-annual financial reports.  

### 2. Evolution of U.S. Crypto Asset ETP Regulation  

#### 2.1 Development History of Crypto Asset ETPs  

Since the Winklevoss twins first filed a Bitcoin ETF application with the SEC in 2013, multiple issuers have attempted to secure approval for Bitcoin ETFs, but U.S. regulators rejected these efforts.  

In October 2021, the SEC approved the first U.S. Bitcoin futures ETF: ProShares Bitcoin ETF (BITO). Following this approval, the SEC faced a court challenge over converting over-the-counter (OTC) Bitcoin spot products into ETPs.  

On August 29, 2023, the U.S. Court of Appeals for the District of Columbia Circuit granted the petitioner’s appeal and vacated the SEC’s prior denial. Shortly afterward, in October 2023, the SEC approved the listing of futures-based Ethereum ETPs. This ruling paved the way for the eventual approval of spot Bitcoin ETPs in January 2024.  

On January 10, 2024, the SEC approved the listing and trading of multiple spot Bitcoin ETPs. Initially, most spot Bitcoin ETP applications proposed in-kind creation and redemption. However, during the SEC’s comment period, all applications were revised to use cash-only creation and redemption. Prior to this approval, all spot Bitcoin ETP applications had been rejected over concerns related to investor protection, potential price manipulation risks, and the lack of surveillance-sharing agreements with larger regulated Bitcoin markets.  

On May 23, 2024, the SEC approved exchange rule changes allowing the listing and trading of multiple spot Ethereum ETPs, which also adopted the cash creation and redemption model.  

#### 2.2 Latest Regulatory Developments for Crypto Asset ETPs  

##### 2.2.1 SEC Issues New Disclosure Guidance for Crypto Asset ETPs  

On July 1, 2025, the SEC’s Division of Corporation Finance issued new disclosure guidance for crypto asset ETPs, aiming to provide clear issuance and registration guidelines under the federal securities law framework and promote orderly market operations.  

The guidance specifies that crypto asset ETP issuers must comply with disclosure requirements for product issuance and registration under the Securities Act and the Securities Exchange Act. This includes disclosures related to risk factors, business descriptions, trust service providers, custody of trust assets, fees and expenses, security descriptions, distribution plans, management, conflicts of interest, and financial statements.  

In the short term, this guidance may restrict the issuance of products with insufficient disclosures, prompting investors to reassess risk premiums and potentially leading to outflows from ETP products. In the long term, it will accelerate the application and launch of products by leading institutions, reduce regulatory uncertainty and compliance costs, and foster a more mature and orderly crypto asset investment ecosystem.  

##### 2.2.2 Exchanges Push for Universal Listing Standards for Crypto ETPs  

Notably, alongside critical strides in the operational model of crypto ETPs, their listing channels are also poised for significant optimization.  

Cboe BZX, Nasdaq, and NYSE Arca filed a landmark rule change proposal with the SEC, seeking to establish universal listing and trading standards for commodity trust shares. This aims to streamline the approval process for public trading of such products. Under current rules, exchanges must file Form 19b-4, triggering a review period of up to 240 days. The proposed framework would shorten this timeline by institutionalizing and standardizing the “per-token review” listing process. This would significantly simplify listing procedures, reduce issuance costs, and create an efficient, transparent listing channel for commodity-based ETPs, including crypto assets.  

### 3. Industry Significance of In-Kind Creation and Redemption Mechanisms  

#### 3.1 Mechanistic Comparison: In-Kind vs. Cash Creation and Redemption  

Prior to this approval, spot Bitcoin and Ethereum ETPs in the U.S. market were required to use cash-based creation and redemption. This meant that when authorized participants (typically traditional giants like Goldman Sachs and JPMorgan or specialized market makers) created ETP shares, they first delivered cash to the issuer, which then purchased Bitcoin or Ethereum on the spot market. For redemptions, issuers sold crypto assets for cash before delivering funds to authorized participants.  

The in-kind model allows authorized participants to directly deliver actual Bitcoin or Ethereum to ETP issuers in exchange for new shares. For redemptions, ETP issuers can directly deliver the corresponding crypto assets to authorized participants. This eliminates the need for issuers to manage large cash and crypto asset flows and enables complex trading operations to be completed quickly.  

#### 3.2 Positive Impact on Crypto Asset Markets  

In-kind creation and redemption offer significant advantages in controlling transaction costs and slippage, reducing potential tax burdens, improving asset pricing efficiency, and enhancing market liquidity.  

1. **Transaction Costs and Slippage**: Cash-based creation and redemption involve large-scale crypto asset purchases and sales, leading to accumulated transaction fees and slippage in block trades. Applying the in-kind model to crypto ETPs reduces trading friction and provides greater flexibility for issuers and market makers.  

2. **Tax Burdens**: Under IRS rules, when converting cryptocurrencies to fiat currency (subject to capital gains tax), investors must calculate capital gains or losses by subtracting their cost basis from the selling price and pay corresponding capital gains taxes. Cash-based creation and redemption involve the buying and selling of crypto assets, increasing tax complexity and potential capital gains tax liabilities—costs often passed on to investors. The in-kind model allows investors to defer capital gains until sale, offering more flexible tax planning.  

3. **Pricing Efficiency**: Cash-based creation and redemption can cause discrepancies between an ETP’s market price and its net asset value (NAV), especially during periods of high volatility, leading to premiums or discounts. Large-scale cash flows may also force issuers to frequently adjust their portfolios, exacerbating ETP price volatility. In-kind mechanisms help align ETP prices with NAV, improving pricing efficiency and maintaining fair, transparent trading prices.  

4. **Market Liquidity**: The in-kind model is standard in traditional stock and ETP markets. This shift brings crypto asset ETPs in line with traditional commodity ETPs, expanding access to and the range of crypto derivative financial products, and facilitating institutional capital inflows into the crypto sector.  

As Bloomberg analyst James Seyffart noted, by approving in-kind creation and redemption for Bitcoin and Ethereum ETFs, the SEC has paved the way for in-kind models for future altcoin ETFs (e.g., those based on Solana, XRP, etc.).  

### 4. Conclusion  

The SEC’s first approval of in-kind creation and redemption for crypto asset ETPs marks another critical step in building institutional frameworks for crypto financial markets. In-kind mechanisms align the circulation logic of crypto assets with traditional ETFs, providing a mature path for compliant institutional capital entry.  

Meanwhile, regulators are accelerating the improvement of supporting systems. The SEC’s latest disclosure guidance for crypto asset ETPs clarifies registration and disclosure requirements for such products under the federal securities law framework for the first time, offering clearer compliance references for issuers and investors.  

Developments at the exchange level are also noteworthy. Cboe BZX, Nasdaq, and NYSE Arca’s rule change proposal to establish universal listing standards for commodity trust shares aims to streamline crypto ETP approval processes. If implemented, this reform would address longstanding issues of “queuing delays” and significantly enhance market efficiency and transparency.  

Overall, both the in-kind creation and redemption mechanism and the new disclosure policy point to a clear trend: crypto assets are rapidly moving toward a phase of greater clarity, regulability, allocability, and alignment with traditional financial logic. Market sentiment is shifting from regulatory defense to proactive engagement, and from speculation-driven to value-driven allocation. Future competition will no longer focus solely on product design but on who can first strike the optimal balance between compliance and risk control, building a robust and sustainable crypto asset investment system.  

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