SEC Greenlights In-Kind Redemptions for Bitcoin and Ether ETFs, Marking Major Shift in Market Structure

The U.S. Securities and Exchange Commission (SEC) has approved in-kind creation and redemption processes for spot bitcoin and ether ETFs, aligning the products more closely with traditional equity-based ETFs and paving the way for greater market efficiency.

Under the new framework, ETF issuers and authorized participants (APs) can now create or redeem shares using bitcoin or ether directly, instead of converting back and forth between cash and crypto. This change eliminates a key friction point in ETF operations and is expected to reduce volatility while making large institutional trades smoother.

“This is a major structural upgrade for institutional investors managing large positions in crypto ETFs,” said Laurent Kssis, ETF expert and crypto trading adviser at CEC Capital. “We’ve already seen how in-kind mechanisms improve execution and reduce disruption in European markets. This will be a game-changer in the U.S. as well.”

From Cash-Based to In-Kind: What Changes

Since their launch last year, U.S. spot crypto ETFs operated under a cash-only model. APs were required to submit cash to ETF issuers, who then bought the underlying assets in the open market—often at the time the ETF’s net asset value (NAV) was calculated. During redemptions, the reverse occurred: issuers sold bitcoin or ether and returned cash to APs.

This process often caused price swings due to concentrated buying or selling around the NAV calculation window, a vulnerability that amplified volatility, especially during periods of market stress.

The in-kind model eliminates this problem. Instead of moving cash, APs deliver the actual crypto assets directly to the issuer in exchange for ETF shares. For redemptions, ETF shares are swapped back for the underlying assets—streamlining the process and minimizing market disruption.

Market Impact and Industry Reactions

Kssis called the move a “watershed moment” for the digital asset space, noting that large-volume redemptions in the previous model forced massive market orders that worsened price volatility.

“By shifting to in-kind redemptions, we remove a major volatility trigger. The transfer of crypto assets becomes cleaner and less disruptive. This isn’t theory—it’s already proven to work in Europe,” he added.

According to a New York Digital Investment Group (NYDIG) analysis, the in-kind model has broader implications beyond operational efficiency. It could lead to tighter ETF spreads, better tracking to NAV, lower costs for creation and redemption, and potentially lower capital gains distributions.

“Because ETF creations and redemptions can now be settled using the underlying crypto, the need for aggressive ETF share trading around NAV windows could decline,” NYDIG said. “This may also reduce arbitrage-induced volatility and provide a more stable pricing environment.”

Cash Model’s Drawbacks Now in Focus

The inefficiencies of the previous cash-based setup have been widely criticized. During high-stress trading days, large redemption flows could force ETF managers to sell crypto quickly, potentially depressing prices and creating a feedback loop of volatility.

Analysts say the rigid structure also made arbitrage harder, often resulting in wider bid-ask spreads and larger deviations between ETF market prices and NAV.

AI models evaluating the ETF structures have echoed these concerns, noting that the lack of in-kind flexibility limits price alignment mechanisms and contributes to erratic price action during periods of stress.