The Securities and Exchange Commission is becoming rather crypto friendly. This transition occurred when the new administration entered in January.
Anyone who is in the crypto industry knowns the impact ETFs are having. Both Bitcoin and Ethereum were approved. There are others which were filed for, causing many to speculate when approval might be forthcoming.
One such coin is Solana.
ETFs are rather limited on the issuers part. At this moment, redemptions are cash only. It is a situation that, according to Hester Peirce, could be changing.
SEC Peirce: In-Kind Crypto Redemptions "On The Horizon"
ETFs raise money through the sale of units in a particular assets. For crypto, the biggest is Bitcoin. Blackrock is the leaders in this realm, with its ETF near $70 billion.
When USD goes in, the funds are used to buy Bitcoin. That is held by the custodian, with the asset backing the fund.
If one goes to redeem their holdings (not trade), the fund manager (Blackrock in this example) pays out the money in USD. This is mostly major institutions operating at this level.
We are looking at a cash in, cash out system.
Many ETFs do not operate on the cash basis. Instead, they are "in-kind". What this means is the redemption can also be paid out in the asset.
For example, a silver ETF could have its redemption by the distribution of physical silver. The same is true for oil, gold, and other commoditites.
It is not the case, however, for crypto. So far, under the Gensler regime, only cash redemption was approved.
A change by the SEC would allow redeemers in the Bitcoin (and ultimately Ethereum) to receive the asset upon redemption. This means an entity like Blackrock could transfer the associated amount of BTC to fulfill the transaction.
Another Step Forward
We can see how this would be another step forward.
To start, it would move Bitcoin to the same level as other ETF assets. Issuers would have the option of how they establish their funds.
Another positive is the fact that the sell pressure on Bitcoin could be reduced.
When a large redemption happens, the Bitcoin has to be sold for cash. This is what the contract has to be fulfilled in. However, a switch to in-kind means that some might simply want the asset itself. Again, this is likely at the institution level, by an entity that already is adept at the custody of asset (even if through other institutions). Under this scenario, that financial entity could just as easily contract with Coinbase like Blackrock does.
How soon could this become a reality? It is hard to say.
Republican Commissioner Peirce was asked on Wednesday during a panel at the Bitcoin Policy Institute whether the SEC would sign off on in-kind creation and redemptions and if that "was on the horizon." Firms, including BlackRock, have been asking the agency for months to allow for in-kind creations and redemptions for bitcoin ETFs specifically, instead of having to use cash.
"Those (forms) are going through the process now," Peirce said. "So I think that's something that's certainly on the horizon at some point. I can't prejudge, but we hear that there's a lot of interest."
The goal is to get the assets moving as efficiently as possible.
One advantage that Bitcoin and other crypto assets have is they exist in digital form. Unlike other commodities which are physical, the moving of crypto is simple and efficient. While custody is important, there is no physical storage or transporting of the product. This is not the case with something like oil.
In other words, settlement for in-kind is much easier.
My guess is we will see this approved before the end of the year. It is to the benefit of the institutions, evidenced by the continued requests by the likes of Blackrock.
With the SEC looking to enhance crypto's standing, moves like this are going to keep forthcoming.