What Impact Will the SEC’s In-Kind Redemption Approval Have on the Bitcoin and Ether ETF Landscape?

SEC Greenlights In-Kind Redemptions for Bitcoin, Ether ETFs in Major Structural Shift

The U.S. Securities and Exchange Commission (SEC) has approved in-kind creations and redemptions for spot bitcoin (BTC) and ether (ETH) exchange-traded funds, marking a pivotal change in how these products operate. The move brings U.S.-listed crypto ETFs closer to traditional ETF standards and is expected to significantly reduce trading inefficiencies and volatility.

Previously, ETF issuers had to rely on cash-based systems, where authorized participants (APs) delivered or received cash to create or redeem ETF shares. The issuer would then trade the underlying crypto asset on the open market, often triggering price swings—especially during NAV fix windows.

Now, under the in-kind model, APs can directly deliver bitcoin or ether to the fund in exchange for shares and receive the same asset during redemptions. This eliminates forced market transactions and aligns the U.S. model with European structures, which already use in-kind mechanisms.

“For institutional investors managing large positions, this is a game changer,” said Laurent Kssis, ETF expert and trading adviser at CEC Capital. “We’ve seen first-hand in Europe how in-kind redemptions reduce volatility and improve execution.”

More Efficient Market Dynamics

This shift is expected to create tighter bid-ask spreads, lower tracking error, and decrease create/redeem costs, according to the New York Digital Investment Group (NYDIG). It also minimizes the impact of large trades on the underlying crypto market and dampens price disruptions during volatile periods.

“In-kind flows allow for smoother ETF operation without the liquidity stress we often see in cash-based redemptions,” Kssis added. “It breaks the cycle of forced buying and selling during market stress.”

Implications for the Secondary Market

The update also has broader market implications. Since ETF shares can now be created and redeemed via crypto rather than cash, trading activity in secondary markets may decline during peak NAV calculation periods. As a result, pricing should track NAV more closely, and ETF structures may now offer better tax efficiency.

Cash Redemptions Amplified Volatility

Under the prior system, large inflows and outflows forced issuers to execute significant trades in the open market, increasing slippage and volatility. This inefficiency has long been flagged as a risk—particularly during redemptions in times of market stress.

“Cash-based ETFs lack the real-time arbitrage features of in-kind models, often leading to wider spreads and NAV misalignment,” AI-based research from NYDIG noted.

The SEC’s decision is widely seen as a milestone that enhances the appeal of U.S.-listed crypto ETFs to institutional investors and may pave the way for more robust and scalable products in the future.