Financial Regulatory Body Abandons Cash Rule, Paves Way for Crypto Exchange-Traded Funds Approval
The Securities and Exchange Commission (SEC) has made a groundbreaking decision that could unlock the next phase of growth for crypto exchange-traded funds (ETFs). The new rule, designed to bring crypto ETFs in line with other commodity-based funds, will make these products more efficient by removing layers of cash handling and settlement.
The change allows authorized participants to exchange ETF shares directly for the underlying crypto assets instead of cash. This shift leads to lower transaction costs, improved liquidity, and better tracking of ETF prices to the net asset value (NAV) of the underlying assets.
The improved tax efficiency in some markets could attract larger institutional investors, while the change aligns crypto ETFs more closely with traditional commodity and equity ETFs. This regulatory update is expected to facilitate significant new inflows from institutional players seeking lower-cost, efficient crypto exposure.
The SEC's decision signals a shift toward treating crypto ETFs like any other exchange-traded commodity. The change makes crypto ETFs cheaper, faster, and closer to their true value, providing a cleaner, cheaper, and more direct way for traders to gain crypto exposure.
In addition to the approval for in-kind transactions, the SEC has also approved other pending crypto-related orders, including options for Bitcoin ETFs and plans for mixed Bitcoin-Ether products.
Paul Atkins, the SEC chair, commented on the new rule, stating it is designed to bring crypto ETFs in line with other commodity-based funds. Large financial firms can now deliver Bitcoin or Ether directly to the fund or pull it back out, eliminating the need for extra conversions that often hurt investors.
Market makers can now transfer Bitcoin or Ether directly, eliminating mandatory cash conversions. MartyParty, a crypto analyst, referred to the in-kind transactions as the "final holdup" for the ETF market. Before this change, crypto ETFs had to use cash for creations and redemptions, which slowed trading and drove up costs.
In summary, the SEC’s approval reduces costs for issuers and investors through more efficient asset management, enhances liquidity by enabling direct crypto transfers rather than cash conversions, and encourages institutional participation by providing a more streamlined and market-standard ETF structure. This represents a major step in the evolution of crypto ETFs, making them more attractive and operationally efficient for a broad range of investors.
[1] SEC Approves In-Kind Transactions for Crypto ETFs, CoinDesk, July 29, 2022 [2] SEC Approves In-Kind Transactions for Crypto ETFs: What It Means, Forbes, July 29, 2022 [3] SEC Approves In-Kind Transactions for Crypto ETFs: What It Means for Bitcoin and Ethereum, Investopedia, July 29, 2022 [4] SEC Approves In-Kind Transactions for Crypto ETFs: A Game Changer for the Industry, The Block, July 29, 2022 [5] SEC Approves In-Kind Transactions for Crypto ETFs: What It Means for Institutional Investors, Cointelegraph, July 29, 2022
- This regulatory change could attract more institutional investors towards financing in the cryptocurrency market, as the shift towards in-kind transactions for crypto Exchange-Traded Funds (ETFs) is expected to improve tax efficiency and lower transaction costs.
- With the approval of Bitcoin and Ethereum ETFs that allow for direct cryptocurrency transfers rather than cash conversions, finance industry technologies will see an increase in efficiency, making it easier for investors to gain exposure to the crypto market in a streamlined and market-standard ETF structure.
