- On January 27 the CBOE BZX Exchange formally submitted a 19b-4 filing to the U.S. SEC regarding amendments to Bitcoin and Ethereum exchange-traded funds.
- The proposed in-kind mechanism is designed to improve operational efficiency while also enhancing liquidity and offering greater flexibility for institutional investors managing these funds.
The Cboe BZX Exchange, a U.S.-based equities and options trading platform, has submitted a proposal to the U.S. Securities and Exchange Commission (SEC) to amend the ARK 21Shares Bitcoin ETF (ARKB) and the 21Shares Core Ethereum ETF (CETH). The proposed change was revealed by ETF Store President Nate Geraci on January 28 via X and seeks to permit in-kind creations and redemptions for these ETFs, a move that could revolutionize crypto ETF operations.
Cboe files 19b-4 to permit in-kind creations & redemption on BOTH the ARK 21Shares Bitcoin ETF & 21Shares Core *Ethereum* ETF… pic.twitter.com/lQklURfNbU
— Nate Geraci (@NateGeraci) January 27, 2025
In-kind creations and redemptions describe a mechanism where physical assets like Bitcoin or Ethereum are utilized to create or redeem shares in an exchange-traded fund (ETF), bypassing cash transactions. When new ETF shares are issued, authorized participants (APs) provide Bitcoin or Ethereum as payment instead of using cash. Likewise, when APs redeem shares, they receive equivalent amounts of cryptocurrency rather than cash.
This method helps ensure that the ETF’s value closely reflects its underlying assets and reduces the expenses and complexities that come with cash exchanges.
The in-kind mechanism enhances ETF operations by lowering costs, improving liquidity, and ensuring price efficiency. It reduces transaction fees and taxable events, offers flexibility for institutional investors, and aligns ETF prices with underlying assets, highlighting the significance of the recent Cboe filing.
Bloomberg analyst James Seyffart praised the proposal, emphasizing that in-kind mechanisms streamline ETF operations by reducing the number of steps and parties involved. “In my opinion the ETFs should have been allowed to do this from the get-go but the Dem SEC commissioners were against it.” Seyffart noted on X.
Industry-Wide Shift Towards In-Kind Models
Cboe’s proposal follows Nasdaq’s similar application on behalf of BlackRock for its iShares Bitcoin Trust (IBIT). BlackRock’s ETF, launched in January 2024, has become the largest spot Bitcoin ETF, with nearly $40 billion in inflows, marking the most successful ETF debut in history. The SEC initially approved Bitcoin and Ethereum ETFs for cash-based transactions, but the growing adoption of in-kind mechanisms signals a shift in regulatory and operational strategies.
This trend is further reinforced by the SEC’s October 2024 decision to approve rule modifications allowing options trading on spot Bitcoin ETFs. The approval enabled CBOE to list options on ten Bitcoin ETFs, although the Grayscale Bitcoin Mini Trust (BTC) was excluded.
ARKB ranks as the fourth-largest Bitcoin ETF, with $2.91 billion in cumulative net inflows, $5.10 billion in total net assets, and a 0.25% share of the total Bitcoin market. Meanwhile, CETH is the 8th largest Ethereum ETF, reporting $11.40 million in cumulative inflows and $16.77 million in net assets as of January 27. These figures reflect their growing influence in the competitive crypto ETF landscape.
If approved, Cboe’s amendment could set a new standard for crypto ETF operations, and by adopting in-kind models, the industry aims to align crypto ETFs with traditional ETF practices, signaling a maturing market under the new SEC administration.
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