Coin WorldWednesday, Jun 25, 2025 8:37 pm ET

2min read

The Securities and Exchange Commission (SEC) is reportedly considering the inclusion of physical redemption in the approval process for crypto exchange-traded funds (ETFs). This development comes as the regulatory body seeks to address concerns surrounding the transparency and liquidity of crypto ETFs. Physical redemption allows authorized participants to redeem shares of the ETF for the underlying assets, providing a mechanism for price discovery and ensuring that the ETF's share price closely tracks the value of the underlying assets.

Hester Peirce, an SEC member, indicated that the SEC is reviewing the feasibility of physical redemption for cryptocurrency ETFs, with companies like BlackRock showing significant interest. Peirce's comments highlight potential market changes as ETF structures may evolve, affecting transaction costs and liquidity. Such reform in ETF mechanics promises to reduce costs related to transactions and slippage, increasing efficiency and liquidity in the crypto market. Should the SEC approve, it could lead to increased institutional participation in the ETF market. As Peirce noted, "These (forms) are currently under review. So I think that at some point, the physical subscription and redemption mechanism will definitely come. I can’t judge in advance, but we have heard that many companies are very interested in this."

Market reactions have been positive, with expectations of improved ETF efficiency. Peirce mentioned that significant industry interest is already being observed, as companies anticipate possible changes in SEC regulations and preparations for new investment structures. The potential shift in cryptocurrency ETF structures is reminiscent of changes made to gold ETFs, which significantly improved liquidity and market reach once in-kind redemption was allowed. This feature is already present in some traditional ETFs, where authorized participants can redeem shares for the underlying securities. By incorporating physical redemption into crypto ETFs, the SEC aims to mitigate risks associated with price manipulation and ensure that the ETFs operate in a manner consistent with investor protection principles.

The move by the SEC is part of a broader effort to provide regulatory clarity for the crypto industry. Regulatory clarity is expected to reopen the domestic token-issuance market and pave the way for spot and index-based crypto-asset ETFs. This development could potentially attract more institutional investors to the crypto market, as it addresses some of the key concerns they have regarding the regulatory environment and the transparency of crypto ETFs. The inclusion of physical redemption in crypto ETFs would also align with the practices of other financial instruments, such as the ARK ETFs, where shares may only be redeemed directly with the ETFs at net asset value (NAV) by authorized participants in very large creation units. This mechanism ensures that the ETF's share price remains closely tied to the value of the underlying assets, providing investors with greater confidence in the ETF's pricing and liquidity.

The consideration of physical redemption in crypto ETFs is a positive development for the crypto industry, as it demonstrates the SEC's commitment to creating a robust regulatory framework for digital assets. This move could potentially lead to increased adoption of crypto ETFs by institutional investors, as it addresses some of the key concerns they have regarding the regulatory environment and the transparency of these financial instruments. However, it remains to be seen how the SEC will ultimately implement this feature and what impact it will have on the crypto market.