1. Policy Overview and Event Background
1.1 SEC Policy Summary
On July 29, 2025, the U.S. Securities and Exchange Commission (SEC) allowed Authorized Participants (APs) to conduct in-kind creations and redemptions for crypto asset Exchange Traded Products (ETPs). Plus, the SEC approved a new framework for spot Bitcoin ETF options trading. This includes introducing Flexible Exchange Options (FLEX) and customizable derivatives, giving market players more say in contract features like strike prices, expiration dates, and exercise styles. And get this—the SEC bumped up the position limits for Bitcoin ETF options from 25,000 contracts to ten times that, hitting 250,000 contracts. This move signals a big shift for U.S. securities regulators in the crypto world, offering more relaxed rules for ETP issuers, authorized participants, and investors, while boosting trading efficiency and market liquidity.
1.2 Differences Between Crypto Asset ETPs and Traditional ETFs
Exchange-Traded Products (ETPs) are investment products listed and traded on national securities exchanges, including Exchange-Traded Funds (ETFs), Exchange-Traded Notes (ETNs), and Exchange-Traded Commodities (ETCs). Crypto asset ETPs are usually set up as trusts, holding assets made up of spot crypto assets or derivatives tied to crypto assets. The trust acts as the securities issuer, registering its securities issuance and categories under the Securities Act of 1933 and the Securities Exchange Act of 1934, and it's bound by federal securities laws' anti-fraud provisions.
ETFs are registered under the Investment Company Act of 1940. ETF issuers rely on authorized participants to create and redeem ETF shares in exchange for securities or baskets of securities that the ETF tracks. Authorized participants then trade those ETF shares on exchanges (that's the secondary market).
Reporting requirements for ETPs differ from ETFs. ETPs have to submit annual audited financial statements (Form 10-K) and quarterly financial statements (Form 10-Q), just like traditional companies listed on U.S. stock exchanges. In comparison, while ETFs also submit annual audited financial statements (Form N-CSR), they only need to add semi-annual financial statements.
2. Evolution of U.S. Crypto Asset ETP Regulation
2.1 History of Crypto Asset ETP Development
Since 2013, when the Winklevoss first submitted a Bitcoin ETF application to the U.S. SEC, multiple issuers have tried to get approval for creating Bitcoin ETFs, but U.S. regulators shot down various attempts.
In October 2021, the SEC approved the first U.S. Bitcoin futures ETF: ProShares Bitcoin ETF (BITO). After this futures ETF got the green light, the SEC faced a court lawsuit about converting over-the-counter (OTC) Bitcoin spot products into ETPs.
On August 29, 2023, the D.C. Circuit Court of Appeals granted the applicant's appeal and overturned the SEC's previous denial. Soon after, in October 2023, the SEC approved the listing of futures Ethereum ETPs. This ruling paved the way for the final approval of spot Bitcoin ETPs in January 2024.
On January 10, 2024, the SEC approved the listing and trading of multiple spot Bitcoin ETPs. Initially, most spot Bitcoin ETP applications said they'd use in-kind creation and redemption. But during the SEC's comment period, all applications were revised to only use cash creation and redemption. Before this approval, all applications for spot Bitcoin ETPs failed due to investor protection issues, potential risks of price manipulation, and the lack of surveillance-sharing agreements with larger regulated Bitcoin markets.
On May 23, 2024, the SEC approved changes to exchange rules, allowing the listing and trading of various spot Ethereum ETPs. The cash creation and redemption model carried over to spot Ethereum ETPs too.
2.2 Latest Regulatory Updates on Crypto Asset ETPs
2.2.1 SEC Releases New Disclosure Guidelines for Crypto Asset ETPs
On July 1, 2025, the SEC's Division of Corporation Finance rolled out new disclosure guidelines for crypto asset ETPs, aiming to provide clear guidance on issuance and registration under the federal securities law framework, helping the market run more smoothly and standardized.
The guidelines state that crypto asset ETP issuers must follow the Securities Act and Securities Exchange Act rules for product issuance and registration disclosures. This includes risk factors, business descriptions, trust service providers, custody of trust assets, fees and expenses, securities descriptions, distribution plans, management, conflicts of interest, financial statements, and more.
In the short term, these guidelines might hold back some products with insufficient disclosures, prompting investors to reassess risk premiums and potentially leading to outflows from ETP products. In the long run, this will speed up applications and launches from top institutions, cut down on regulatory uncertainty and compliance costs, and build a more mature and orderly crypto asset investment ecosystem.
2.2.2 Exchanges Push for Universal Listing Standards for Crypto ETPs
What's worth noting is that, beyond a key step in how crypto ETPs operate, their listing pathways are also set for major improvements.
The Chicago Board Options Exchange BZX (Cboe BZX), Nasdaq, and New York Stock Exchange Arca (NYSE Arca, Inc.) submitted a significant rule change proposal to the SEC. It suggests creating universal listing and trading standards for commodity trust shares, aiming to speed up the approval process for these products to trade publicly. Under current rules, exchanges must file Form 19b-4, triggering a review period of up to 240 days. The proposed framework could shorten that time, institutionalizing and standardizing the "one coin, one review" listing process. This would greatly simplify listings, lower issuance costs, and open up an efficient, transparent pathway for commodity ETPs, including those for crypto assets.
3. Industry Impact of In-Kind Redemption Mechanism
3.1 Comparison Between In-Kind and Cash Redemption Mechanisms
Before this approval, spot Bitcoin and Ethereum ETPs in the U.S. market were required to use cash creation and redemption. That means when authorized participants (usually big names like Goldman Sachs, JPMorgan, or specialized market makers) subscribe for ETP shares, they hand over cash to the issuer first, and then the issuer buys Bitcoin or Ethereum on the spot market. For redemptions, the issuer sells the crypto assets for cash before delivering it to the authorized participants.
In-kind redemption lets authorized participants directly deliver actual Bitcoin or Ethereum to the ETP issuer to subscribe for new shares. During redemptions, the ETP issuer can hand over the corresponding crypto assets straight to the authorized participants. So, issuers don't have to juggle massive cash flows and crypto asset flows, and they can wrap up complex buy-sell operations quickly.
3.2 Positive Effects on the Crypto Asset Market
In-kind redemption shines in controlling trading costs and slippage, easing potential tax burdens, improving asset pricing efficiency, and boosting market liquidity.
(1) Trading Costs and Slippage: Cash redemption involves large-scale crypto asset buying and selling, piling up transaction fees and causing slippage during big trades. Applying in-kind redemption to crypto ETPs cuts down on trading friction and gives issuers and market makers more flexibility.
(2) Tax Burdens: According to IRS rules, when exchanging crypto for fiat currency that involves capital gains tax, investors subtract the cost basis from the sale price to figure out capital gains or losses and pay the corresponding capital gains tax. Cash redemption ties into buying and selling crypto, adding tax complexity and potential capital gains tax burdens, which often get passed on to investors. In-kind redemption lets investors delay capital gains until they sell, offering more flexible tax planning.
(3) Pricing Efficiency: Cash redemption can lead to differences between ETP market prices and their net asset values, especially in volatile times, creating premiums or discounts. Heavy cash creations and redemptions might force issuers to tweak their asset portfolios often, causing ETP price swings. In-kind redemption helps keep ETP prices in line with net asset values, improving pricing efficiency and maintaining fair, transparent trading prices.
(3) Market Liquidity: Traditional stocks and ETP markets usually go with in-kind redemption. Shifting to this model puts crypto asset ETPs on the same footing as traditional commodity ETPs, expanding access and scope for crypto derivative financial products, and helping traditional institutions pour money into crypto.
As Bloomberg analyst James Seyffart pointed out, by approving in-kind creation and redemption for Bitcoin and Ethereum ETFs, the SEC is paving the way for future altcoin ETFs (like those based on Solana, XRP, etc.) to use in-kind models too.
4. Wrapping Up
The SEC's first approval for crypto asset ETPs to introduce in-kind redemption is another key addition to the institutional setup of the crypto finance market. In-kind redemption makes the flow of crypto assets more like traditional ETFs, providing a solid path for institutional funds to enter compliantly.
At the same time, regulators are speeding up improvements to supporting systems. The SEC's latest disclosure guidelines for crypto asset ETPs clearly outline registration and disclosure requirements under the federal securities law framework for the first time, giving issuers and investors clearer compliance references.
Actions on the exchange side are worth watching too. Cboe BZX, Nasdaq, and NYSE Arca have submitted rule change proposals to the SEC, planning to set up universal listing standards for commodity trust shares to simplify the listing approval process for crypto ETPs. If this reform lands, it could solve the old issues of long queues and slow approvals, significantly boosting market efficiency and transparency.
Overall, whether it's the in-kind redemption mechanism or the new disclosure rules on the policy side, everything points to one clear trend: crypto assets are accelerating toward a clearer, more regulated, configurable stage that's highly aligned with traditional finance operations. The market's direction is shifting from defensive regulation to active embrace, from speculation-driven to value allocation. Future competition might not just stay at the product design level but focus on who can first find the best balance between compliance and risk control, building a steady and sustainable crypto asset investment system.