In-Kind Redemptions 101: What the SEC’s New ETF Rule Means for Crypto Funds

Title: In-Kind Redemptions 101: What the SEC’s New ETF Rule Means for Crypto Funds

Introduction On July 29, 2025, the U.S. Securities and Exchange Commission (SEC) voted to allow in-kind creations and redemptions for spot Bitcoin and Ether exchange-traded funds (ETFs). Under the previous cash-only model, authorized participants (APs)—large institutions and market makers—had to trade ETF shares for U.S. dollars, incurring extra fees, slippage and tax drag. With in-kind settlement, APs can swap actual BTC or ETH for ETF shares. This change brings crypto ETFs in line with commodity funds like gold, paving the way for tighter spreads, lower fees and deeper liquidity.

What Is In-Kind Settlement? In an in-kind process, an AP delivers the underlying asset—Bitcoin or Ether—to the ETF custodian in exchange for newly created ETF shares (creation). On redemption, the AP returns ETF shares and receives the equivalent crypto. Because no cash conversion is needed, funds avoid exchange execution costs and taxable events at the fund level.

Benefits for Liquidity and Arbitrage By settling baskets of actual crypto, APs bypass exchange fees and conversion slippage. That fosters tighter bid-ask spreads on ETF shares and reduces tracking error versus spot prices. When ETF prices stray from net asset value (NAV), APs can perform in-kind arbitrage—buying or selling baskets of BTC/ETH—to realign valuations, strengthening secondary-market liquidity.

Fee Compression and Tax Efficiency Cash redemptions force APs to liquidate crypto for dollars, triggering capital gains within the fund and potential taxable distributions for shareholders. In-kind redemptions remove this friction: the swap of assets occurs off-market, so the fund itself does not realize gains. Over time, lower operational costs (no execution fees or custody roundtrips) should translate into reduced expense ratios, benefiting both retail and institutional investors.

Learning from Gold ETFs Gold ETFs introduced in-kind creation in 2004. Between 2004 and 2010, fierce competition drove iShares Gold Trust’s fee from 0.40% to 0.25%. By late 2018, SGOL cut its ratio to 0.17%, compelling peers like GLD and IAU to follow suit. Crypto funds, now freed to compete on an even footing, are likely to see a similar downward trajectory in fees.

Winners, Losers and Market Impact Issuers with prearranged in-kind frameworks—such as BlackRock’s IBIT/ETHA, Fidelity’s Wise Origin and Ark 21Shares—can activate the new mechanism swiftly, thanks to established AP networks and custodial partnerships (e.g., Coinbase Custody). Legacy vehicles lacking such setups—Grayscale’s GBTC, ETC Group’s ETHE—may experience outflows as investors chase lower-cost alternatives. Spot exchanges could also see reduced volumes as basket transfers migrate off-venue.

Projected Inflows and Outlook Analysts at Steno Research forecast $15–20 billion in net inflows to spot Ether ETFs within 12 months, driven by institutional demand for tax-efficient, low-friction products. In 2024, U.S. spot Bitcoin ETFs already drew $35.7 billion, underscoring strong market appetite. With in-kind mechanics in place, new launches stand to capture an even greater share of BTC and ETH trading volumes through fund vehicles.

Investor Takeaways

• Expect narrower ETF spreads, lower annual fees and improved NAV tracking.
• Institutional arbitrage and hedging will become more efficient.
• Retail investors benefit indirectly via enhanced liquidity and reduced tax unpredictability.

Conclusion The SEC’s in-kind redemption rule represents a watershed for crypto ETFs, marrying commodity best practices with digital assets. By removing structural frictions, the rule sets the stage for fee compression, deeper liquidity and robust arbitrage. As fund competition heats up, investors should monitor expense ratios, tracking errors and AP network strength to capitalize on this next phase of crypto ETF evolution.