SEC Approves In-Kind Creations And Redemptions For Crypto Asset ETPs

Key Takeaways

• The SEC recently approved an order allowing in-kind creations and redemptions for certain bitcoin and ether-based crypto ETPs, improving efficiency and tax benefits.
• The Order applies only to non-registered investment company ETPs and builds on SEC guidance permitting broker-dealers to custody crypto assets.
• Exchanges may need individual SEC approvals for each crypto ETP seeking in-kind transactions, and further regulatory guidance may be required.
• Issuers should amend agreements with APs to enable in-kind processes and prepare for potential expansion to other crypto assets.

On July 29, 2025, the Securities and Exchange Commission voted to approve an order (the "In-Kind Order" or the "Order") to permit in-kind creations and redemptions by authorized participants ("APs") for certain bitcoin and ether-based crypto asset exchange traded products ("ETPs").¹ The In-Kind Order represents a clear change of direction from the SEC's earlier restrictions on APs custodying crypto that had historically made it difficult to undertake in-kind creations and redemptions for crypto ETPs. This change is likely to increase the efficiency of the creation and redemption process for crypto-based ETPs. Notably, these orders apply only to ETPs that are not registered investment companies, which may face other issues processing in-kind purchases or redemptions in exchange for non-securities assets (e.g., custody of assets or compliance with Investment Company Act Section 22(g)).

In-Kind Creations and Redemptions

In an in-kind creation, an AP (typically a large financial institution, such as a broker-dealer or a bank) delivers the spot assets underlying the ETP to the trust in exchange for trust shares. In an in-kind redemption, an AP delivers trust shares to the trust in exchange for the spot assets underlying the trust. An AP may engage in creations or redemptions on its own behalf, or on behalf of an institutional investor who lacks a direct relationship with the ETP. These twin arbitrage processes seek to ensure that the value of an ETP's shares is closely aligned with the value of the assets held by the trust. The use of in-kind transactions allows ETPs to save on transaction costs and avoid tax inefficiencies for investors holding appreciated crypto. For crypto ETPs, however, in-kind creations and redemptions historically had not been possible because of the SEC's earlier actions discouraging broker-dealers from taking custody of crypto assets.² Thus, for these ETPs, APs had been delivering cash (for share purchases) and receiving cash (for redemptions), limiting these ETPs' ability to realize these efficiencies.

That position changed recently when the Staff of the SEC's Division of Trading and Markets issued a series of "Frequently Asked Questions" (the "FAQs") which confirmed that broker-dealers could take custody of crypto assets, including crypto-asset non-securities (such as bitcoin and ether).³ The FAQs went further, specifically noting that broker-dealers can facilitate in-kind creations and redemptions for spot crypto ETPs,⁴ although the FAQs did not go into detail on how these processes would work.

The In-Kind Order builds on the FAQs, noting that in-kind creations and redemptions have historically been permitted for commodity-trust ETPs, before crypto assets became available.⁵ The Order also notes that in-kind creations and redemptions offer ETPs an additional method of transacting with APs and may enhance tax efficiencies and minimize transaction costs.⁶

Further Thoughts

The In-Kind Order is the latest in a series of developments that make it significantly easier for broker-dealers to hold, and facilitate transactions in, crypto. While the Order relates primarily to the ETPs for which in-kind creations and redemptions will be undertaken, more discussion and guidance may be necessary from the SEC, and perhaps FINRA, around the regulatory requirements for APs undertaking such in-kind creations and redemptions. APs may, for example, benefit from further guidance or discussion around capital, custody and other requirements in relation to the in-kind processes.

It is not yet clear whether other crypto ETP issuers and their listing exchanges can rely on the In-Kind Orders to facilitate in-kind creations and redemptions, or whether such other listing exchanges must file rule proposals pursuant to Rule 19b-4 for each other crypto ETP that seeks to allow in-kind creations and redemptions. At this time, it seems likely that a fresh filing will be required for each crypto ETP that seeks to provide for in-kind creations and redemptions—exchanges and issuers may therefore have to build in the time required for SEC approval before they can undertake these in-kind processes.

Further, while the In-Kind Order specifically relates to ETPs that issue bitcoin and ether-based commodity trust shares, the wording of the Order suggests that similar orders could also be issued for ETPs based on other crypto assets, once such ETPs are available.

In-kind creations and redemptions present new tax considerations for all parties involved. For example, operationalizing the tax reporting for these transactions should be considered in the course of building a process to facilitate in-kind creations and redemptions.

Finally, while crypto ETP issuers will undoubtedly welcome the In-Kind Order and the additional creation/redemption option they provide, issuers should immediately review their agreements with APs to consider what amendments may be necessary in order to allow for in-kind creations and redemptions.

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