The in-kind redemption model has been positively received as a potential addition to the various existing ways cryptocurrencies—especially exchange-traded funds (ETFs)—are utilized. Following Cboe’s filings, spirits are high that the Securities and Exchange Commission (SEC) will finalize and approve an in-kind framework.
But what is it? How does it differ from other ETFs? More importantly, how will it work, and what does its addition mean for the ETF market? Cryptocurrencies, such as Bitcoin, have come a long way from being embraced by the casino industry to becoming the revolutionary currency more and more people are drawn to. Here’s a brief history of crypto, current developments, and how the future is shaping:
Bitcoin’s Redundant Rise
Everyone has probably heard about Bitcoin’s humble origins back in 2009. The novel cryptocurrency had no value, which is incredible given that one BTC has been valued above $100,000 in modern times. The gaming and entertainment industry was among the first to embrace Bitcoin, with casinos accepting it as a way to deposit and withdraw funds. Today, nearly all real money casinos accept dozens of cryptocurrencies. Even new sweeps casinos that are all about the fun of slots and table games, such as poker and roulette, accept Bitcoin, Ethereum, and other popular cryptocurrencies. Bitcoin grew from being a virtual currency to a payment method, a wallet, a store of value, an investment vehicle, and more.
Today, you can invest in crypto IRAs, including traditional and Roth, which are simply retirement accounts with cryptocurrencies as the main asset. Crypto ETFs have also been approved for both Bitcoin and Ethereum. And now, a new face is emerging in the form of the in-kind redemption model, a framework set to let authorized financial institutions exchange ETF shares directly for crypto assets instead of cash. It’s one more alternative to a cash-based ecosystem, but it has more implications in the crypto sector. Bitcoin has retained all its utility, but continues to redefine various financial and investment landscapes.
What’s the In-Kind Framework About?
The fillings from Cboe and other exchanges may go under the radar for everyday investors, but they mark a major improvement in the crypto ETF market, which has been observably lagging. The fillings reveal that regulators are actively working toward making in-kind redemptions a reality. So what’s in-kind redemption? Well, you should first grasp ETF shares, and even ETFs. Exchange-traded funds are these baskets of investments that feature stocks, bonds, and even crypto, allowing you to invest in multiple securities at once. The ETFs have shares, which have always been traded for cash. In fact, traditional and modern commodity and stock shares are traded for cash.
However, in-kind trading isn’t novel. Gold ETF shares can be exchanged for physical gold. In-kind is literally what the phrase suggests, which is allowing like-for-like trading, such as exchanging crypto ETFs for cryptocurrencies. This doesn’t affect the capacity to exchange crypto ETF shares for cash or other assets. Large financial institutions, or authorized participants, can simply swap ETF shares for cryptocurrencies, such as Bitcoin and Ethereum. ETFs operate this way in many other asset classes, but this will be the first time, which is understandable, considering Bitcoin futures ETFs were only approved by the SEC in 2024. Unfortunately, it’s only the beginning, so only authorized participants, likely large banks and market makers, will be allowed to make such transactions.
How Does This Impact the ETF Market?
The in-kind framework may sound like a behind-the-scenes technical upgrade, but its potential impact on the crypto ETF market is big. It stands to improve efficiency when authorized participants can redeem ETF shares for actual crypto instead of cash. Fund managers don’t need to buy or sell large amounts of Bitcoin or Ethereum in the open market due to crypto-to-cash conversions and vice versa. This can lower transaction costs, reduce market disruption, and tighten the spread between the buying and selling price of crypto ETF shares. The framework also enhances tax efficiency in the ETF structure. In-kind redemptions presumably don’t trigger capital gains within the fund itself, which means they can lead to fewer taxable events.
As an investor, this is a major plus, especially when looking to minimize tax costs over time. In-kind frameworks also embrace traditional equity and commodity ETFs, which use these structural advantages. Cutting out the need for large cash conversions will also make ETFs more efficient, easier, and cheaper to manage. The in-kind framework reduces trading costs and improves liquidity with less friction, which is particularly important in the volatile crypto market. Instead of liquidating to cash, only for crypto’s value to rise again, investors can liquidate to crypto assets and retain value.
Looking Ahead: Enhanced ETF Market Efficiency
There’s no doubt that the in-kind framework for crypto ETF shares is a step forward. Cboe, Nasdaq, and NYSE Arca are all seeking this approval, and the SEC is seeming cooperative. The change won’t necessarily shift away from cash-only redemptions, at least for everyday investors. However, it might result in lower costs and align with traditional investment standards. The promise is a more stable and mature ETF market, which is another reinforcement that cements crypto’s position in the emerging financial market.