Benchmarking gold ETFs! Bitcoin and Ethereum spot ETFs start physical redemption transformation

Source: bitcoinist

Compiled by: Blockchain Knight

The SEC is gradually advancing structural reforms for Bitcoin and Ethereum ETFs. Previously, five products listed on the Cboe BZX Exchange simultaneously applied to switch their cash-only creation and redemption model to a physical creation and redemption mechanism, which has long been widely used in commodity and stock ETFs.

Documents filed later on July 22 include the ARK 21Shares Bitcoin ETF and 21Shares Core Ethereum ETF (jointly included in Amendment No. 3 to SR-CboeBZX-2025-010), the WisdomTree Bitcoin Fund (Amendment No. 1 to SR-CboeBZX-2025-033), and the Fidelity Wise Origin Bitcoin Fund and Fidelity Ethereum Fund (Amendment No. 1 to SR-CboeBZX-2025-023).

Each amendment modifies the provisions in the January 2024 approval documents that mandated cash-only creation and redemption for trusts, replacing them with the phrase "cash or physical transactions" and adding detailed settlement procedures for the direct transfer of Bitcoin or Ethereum between trust custodians and authorized participants

Bloomberg ETF analyst James Seyffart was the first to spot this coordinated action. He told followers on the X platform that these five documents are "another positive sign that Bitcoin and Ethereum ETFs are expected to gain physical creation and redemption rights... This indicates that positive progress is being made within the SEC, and detailed adjustments may be underway."

To avoid misunderstanding, he added: "No, this is not for retail or average investors to exchange ETF shares for the underlying asset or vice versa. This only applies to authorized participants (i.e., large Wall Street institutions and market makers)... This will improve the efficiency of existing and future cryptocurrency ETFs. However, the vast majority of people won't even notice the difference because the products currently on the market are already highly efficient in trading. This adjustment will put cryptocurrency ETPs on an equal footing with other ETPs."

When asked whether retail investors might eventually use physical redemption processes, Seyffart added: "It would be meaningful to see consumers able to redeem ETF shares for actual ETH at certain thresholds. Personally, I think such redemption mechanisms will eventually come to fruition, but it may take a long time. Step by step—some gold ETFs have already achieved this."

When spot Bitcoin ETPs were approved in January 2024, the SEC mandated a cash creation and redemption model: authorized participants inject U.S. dollars into the fund, which then buys cryptocurrencies in the spot market; redemptions operate in reverse. While this design addressed SEC Chairman Gensler's concerns about custody and settlement risks, it created two problems: the trust itself must trade the underlying assets; and when spot liquidity is insufficient, the fund's net asset value (NAV) may deviate from the share price.

The physical creation and redemption mechanism returns trading control to authorized participants: when creating shares, authorized participants directly transfer Bitcoin or Ethereum to the fund's cold wallet; when redeeming, they receive cryptocurrencies instead of cash.

This structure is standard across the ETF ecosystem, narrowing bid-ask spreads, reducing primary market imbalances, and offering significant tax advantages because portfolio securities (here, crypto assets) are transferred "in kind," eliminating the need for in-fund sales to realize capital gains. The SEC itself has noted that ETFs "may be more tax efficient... because ETF shares are typically redeemable 'in kind.'"

Commodity trusts already using physical redemption provide a regulatory template for cryptocurrency issuers. For example, the SPDR Gold ETF allows authorized participants to redeem 100,000 fund shares for physical gold, a feature that ultimately enables individual investors to "arrange through their brokers to obtain ownership of physical gold corresponding to their shares." By adopting similar language, Bitcoin and Ethereum trusts argue that they are merely seeking regulatory treatment equal to that of existing commodity ETPs.

Operational pressures have grown as primary market trading volumes rise.

The 11 spot Bitcoin ETPs approved in 2024 have seen cumulative inflows of nearly $55 billion since their launch; market-making desks must raise billions of dollars by 4 p.m. each settlement day, closing hedging positions after the trust completes cryptocurrency purchases. This ties up balance sheets and widens spreads during volatile periods. With physical delivery allowed, market-making desks can continuously acquire or hedge Bitcoin and Ethereum, transferring assets directly to trust wallets on a T+0 basis.

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