Why the SEC Delayed In-Kind Redemptions for Crypto ETFs

The SEC has hit pause on allowing in-kind redemptions for crypto ETFs — for now, at least.

Crypto issuers like BlackRock, VanEck, Fidelity and WisdomTree have sought to let investors redeem their shares for underlying crypto assets directly (in this case, Bitcoin or Ether), but have all been delayed. In-kind redemptions let funds trade underlying assets for new ones, as opposed to in-cash redemptions, which require the assets to be sold for cash.

Still, experts said approval is probably inevitable, with the move set to elevate crypto strategies’ efficiency by allowing a mechanism that has only been available for traditional ETFs up until now. Approval would also mark the latest step for crypto ETFs toward becoming like their traditional counterparts. “The cash is just an extra step that typically doesn’t happen with other ETFs,” said Roxanna Islam, head of sector and industry research at VettaFi.

Road to Redemption

The SEC has approved a slew of spot Bitcoin ETFs in the roughly 18 months they’ve been around, and now the agency is flooded with proposals from fund managers seeking to offer in-kind redemptions. The strategy is the preferred mechanism for traditional ETFs because it’s less clunky and more tax efficient, but currently, institutional investors are required to sell crypto ETF shares for cash. In-kind redemption approval is set to simplify the process, said Islam. The move will therefore benefit institutional investors more than retail, she added, but will still benefit the latter “in the long run,” by creating more market efficiency across the board. Some funds that have applied to offer in-kind redemptions include:

• BlackRock, which filed to permit in-kind redemptions for its iShares Ethereum Trust (ETHA) and had its decision delayed earlier this month.
• Fidelity, which asked for in-kind redemptions for both the Fidelity Wise Origin Bitcoin Fund (FBTC) and the Fidelity Ethereum Fund (FETH) and had its decision postponed in May.
• VanEck, which requested in-kind redemptions for its spot Bitcoin ETF, VanEck Bitcoin ETF (HODL), and had its verdict pushed back in April.

What’s the HODL-Up? So why has the SEC delayed greenlighting in-kind structures for digital assets? One reason is because the agency tends to exercise extra caution around crypto-related decisions in general, Islam said. Another might be that regulators need more information on how they can “protect against fraud and manipulation,” said Morningstar analyst Bryan Armour. “My guess is they need more time to process the information and work with exchanges to shore up any remaining concerns.”