The U.S. Securities and Exchange Commission (SEC) has initiated a public comment period on a proposal that would allow Bitcoin and Ether exchange-traded funds (ETFs) to create and redeem shares using the underlying cryptocurrencies themselves instead of cash. This “in-kind” redemption method is designed to enhance the efficiency and tax efficiency of these investment vehicles.
On February 5, the Cboe BZX Exchange, a securities exchange, filed an amended application to allow “in-kind” creations and redemptions for two ETFs: the ARK 21Shares Bitcoin ETF (ARKB) and the 21Shares Core Ethereum ETF (CETH).
Currently, Bitcoin and Ether ETFs operate under a “cash” redemption model, where authorized participants redeem shares for cash, requiring the ETF to sell the underlying crypto assets to generate the necessary funds. This process can introduce inefficiencies and potential tax implications for investors.
The proposed “in-kind” redemption mechanism would enable authorized participants to directly exchange ETF shares for the corresponding cryptocurrency, eliminating the need for the ETF to liquidate its holdings. This approach is expected to streamline operations, reduce costs, and enhance the tax efficiency of these funds for institutional investors.
The SEC’s move comes amid a growing trend of institutional interest in cryptocurrency investments. The approval of spot Bitcoin ETFs earlier this year has spurred significant inflows into these products, and the potential introduction of “in-kind” redemptions could further solidify their appeal to institutional investors.
The public comment period will provide stakeholders, including market participants, investors, and industry experts, with an opportunity to weigh in on the proposed rule change. The SEC will carefully consider these comments before making a final decision on whether to permit “in-kind” redemptions for Bitcoin and Ether ETFs.
This development marks a significant step forward in the evolution of the cryptocurrency ETF market. If approved, “in-kind” redemptions could pave the way for greater efficiency, cost-effectiveness, and tax efficiency for investors seeking exposure to these digital assets through exchange-traded funds.
