- The SEC has approved “in kind” processes for creating and redeeming crypto asset ETF shares, replacing prior cash-only settlements.
- This change aims to reduce costs and increase efficiency for ETF issuers, allowing them to handle cryptocurrencies directly.
- Major U.S. banks, through their roles as authorized participants, are expected to increase their involvement with crypto assets.
- Regulatory authorities report that indirect U.S. bank exposure to crypto stood at about $6.7 billion as of mid-2024.
- The SEC also eased regulations for ETF structures and options linked to Bitcoin, raising position limits and allowing more diverse products.
The U.S. Securities and Exchange Commission (SEC) has voted to allow “in kind” creations and redemptions for crypto asset exchange traded product (ETP) shares. This shift, announced yesterday, permits ETF issuers to handle actual cryptocurrency transfers instead of settling ETF shares solely in cash. The SEC decision is designed to increase operational efficiencies and reduce costs for ETF providers.
According to the ETF Database, U.S. crypto ETFs now hold around $183 billion in assets under management. The largest is BlackRock’s iShares Bitcoin Trust (iBIT), which manages $87 billion. For iBIT, a group of authorized participants, including seven connected to major banks such as Bank of America, Citigroup, and Goldman Sachs, helps manage ETF onboarding and redemptions. SEC Chairman Paul Atkins stated, “It’s a new day at the SEC, and a key priority of my chairmanship is developing a fit-for-purpose regulatory framework for crypto asset markets.” He added that the change will lead to a more efficient and less costly ETP process for investors.
Bank regulators classify these authorized participants as having “indirect exposures” to crypto, since they process these assets for ETFs. By mid-2024, indirect U.S. bank exposure reached approximately $6.7 billion, according to the Basel Committee’s reports. The new “in kind” system could raise this total significantly as banks’ roles expand.
When an ETF is redeemed “in kind,” the bank may need to sell cryptocurrency for clients who prefer cash, which might increase direct bank activity in spot crypto trading. However, current Basel rules make direct crypto trading financially discouraging for banks.
The SEC has also relaxed some additional rules, making it possible to launch ETFs that combine both spot and derivatives-based crypto assets and increasing limits for options on certain Bitcoin ETPs to 250,000 contracts. Trading volume in iBIT-linked options has tripled this year, with daily averages reaching around 51 million contracts.
Overall, these adjustments aim to bring crypto ETP processes in line with those for traditional securities, while signaling a shift toward broader institutional participation in the digital asset market.
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