SEC’s Hester Peirce Says In-kind Redemptions for Crypto ETFs are Underway

One of SEC’s top leads Hester Peirce has confirmed that in-kind redemptions and creations for Bitcoin ETFs are currently in talks. The SEC commissioner was asked on Wednesday at the Bitcoin Policy Institute what she thinks about replacing cash with in-kind redemptions, and her response was, “those forms are going through the process now.”

There have been lots of interest regarding a shift from cash to in-kind redemptions. Firms, such as BlackRock, have been requesting for a shift to in-kind redemptions for months for Bitcoin ETFs. Peirce’s confirmation is a wonderful development that could have a significant impact on retail and institutional investors, as well as the broader crypto industry. With in-kind creations and redemptions for Bitcoin ETFs underway, crypto ETFs will finally mirror the model used by traditional stock and commodity ETFs.

Calls For In-Kind Creations and Redemptions for Bitcoin ETFs Soars

Unlike cash-based ETFs, where the issuer will have to sell the underlying asset in the open market for cash and send it to the investor, in-kind redemptions allow only authorized participants (APs) to directly exchange ETF shares for an underlying asset, such as Bitcoin. The APs deliver the exact quantity of the crypto assets to the ETF provider to receive shares in return. Then they return the shares to the ETF provider for the crypto. In this case, no cash is involved. For over a year, the United States SEC and other issuers have been debating whether redemptions should continue to be in cash or kind. While the SEC favored the cash model, firms preferred the in-kind redemptions. According to Bloomberg Intelligence ETF analyst James Seyffart post on X, going for in-kind redemptions will allow ETFs trade more efficiently theoretically because things can be streamlined.

On January 24, Nasdaq filed an amended Form 19b-4 on behalf of BlackRock to allow for redemptions and creations in kind for the company’s iShares Bitcoin Trust. Others, such as WisdomTree Bitcoin Fund, the VanEck Bitcoin Trust, and the VanEck Ethereum Trust, have all filed for an amendment. The industry is pushing for this in-kind model, and even Nasdaq and Cboe, have followed suit with Bitcoin and Ethereum ETFs filings, and would want the in-kind redemption. 

In-Kind Redemptions Offers Tax Advantages

The push for in-kind creations and redemptions is due to the benefits they offer. For example, cash redemptions can be taxable, which lowers gain expectations. In-kind transfers offer tax benefits. Holders will pay fewer taxes depending on the length of their holding period. 

In addition, in-kind creations reduce trading friction and lower liquidity costs. For instance, ETF providers won’t need to sell or purchase crypto on open markets for cash. They simply buy back the shares in exchange for the digital assets. This is more efficient, smoother, and cost-effective. Besides, direct token exchange narrows spreads.

With crypto ETFs aligning with traditional standards, it boosts credibility of the digital asset sector. It will lead to the onboarding of more institutional investors and even pave the way for more ETF filings.  

Will the SEC Approve?

The SEC under the current Trump administration has taken a more reasonable approach to crypto, and may likely sign off on the amended rule. Since January, 2024, several firms have filed for a crypto ETF, from XRP and SOL to DOGE ETFs. According to Seyffart, the odds that the SEC will approve these crypto ETF filings are above 90%.

If approved, it means crypto ETFs are aligning with traditional financial instruments, which is good for the digital currency industry. The change will see increased institutional flow and build a stronger foundation for upcoming crypto ETFs.