SEC Commissioner Hester Peirce has indicated that in-kind redemptions for crypto ETFs could soon become a reality. Speaking during a panel discussion, Peirce said the mechanism is on the horizon, though she emphasized that no official commitments have been made.
In-kind redemptions allow ETF issuers to create and redeem fund shares using crypto assets directly instead of relying on cash. This process could improve efficiency and reduce operational costs. In January, Nasdaq filed a Form 19b-4 on behalf of BlackRock, requesting approval from the U.S. Securities and Exchange Commission to allow such redemptions for its spot Bitcoin ETF.
In-Kind system could offer more flexibility
Commissioner Peirce explained that shifting to an in-kind model would enable investors to receive Bitcoin directly when redeeming ETF shares. This would allow investors the option to self-custody their assets instead of converting to cash. According to Peirce, this change would benefit participants who are familiar with crypto transactions by reducing friction.
Currently, the SEC mandates a cash-based process, requiring issuers to convert crypto assets into cash for redemptions. This system was enforced when the initial batch of spot Bitcoin ETFs gained approval in January 2024. However, a revised in-kind model proposed by BlackRock may offer more flexibility for issuers and investors. Under this structure, assets are transferred as Bitcoin but can still be converted into cash through broker-dealers.
The conception was backed by a professor of finance, Vivian Fang, who claimed that the strategy is similar to how the asset managers deal with redemptions historically. She pointed out that although still in a position to obtain cash, the in-kind model streamlines internal fund operations as well as decouples asset value and direct market price.
SEC actively reviewing submissions and public feedback
SEC has been on the move seeking proposals relating to in-kind transactions. Animosity occurred in February when the agency held a comment period to solicit people’s views regarding this proposed rule change of Nasdaq regarding the ETF by BlackRock. The official review period started when the change of the rule was published in the Federal Register in February and proceeded to May. On May 13, the SEC officially began proceedings under the Securities Exchange Act to assess whether the proposed model complies with regulatory standards. Other issuers such as VanEck and Cboe have also submitted similar filings requesting permission to adopt in-kind mechanisms for their ETFs.
Discussions continue as industry waits for a decision
In April, BlackRock officials met with the SEC’s Crypto Task Force to clarify elements of their proposed model. While the review is ongoing, industry analysts maintain that in-kind processes could improve overall fund performance. Despite the optimism, Peirce stressed that any potential change remains under regulatory review.