Published: January 29, 2025 at 2:41 am
Updated on January 29, 2025 at 2:41 am
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The prospect of in-kind transactions for crypto ETFs has emerged, potentially changing the game in cryptocurrency trading. Cboe is proposing this mechanism for ARK Bitcoin and 21Shares Ethereum ETFs, awaiting the SEC’s ruling. If approved, this could set a new standard in the market, offering both opportunities and pitfalls for investors.
In-kind transactions are basically the direct exchange of the underlying crypto assets, like Bitcoin or Ethereum, for ETF shares. Unlike traditional methods, they skip cash transactions, which can enhance efficiency and cut costs. The tax implications might be an added benefit, too. While this isn’t exactly groundbreaking in traditional finance, it could be a major shift for the typically volatile crypto world.
Cboe BZX Exchange submitted a request to the SEC on January 27 to allow in-kind creations and redemptions specifically for ARK Bitcoin ETF (ARKB) and 21Shares Ethereum ETF (CETH). The filing seeks to change existing rules to facilitate the exchange of ETF shares for the actual underlying assets instead of going through cash.
This proposal targets Authorized Participants (APs), who help facilitate ETF trades, without affecting other established rules related to Bitcoin and Ethereum ETFs.
According to Cboe’s filing, the ARK Bitcoin Trust and Ethereum Trust would process shares in blocks of 5,000 for Bitcoin and 10,000 for Ethereum, based on their net asset value (NAV). APs would then swap Bitcoin or Ethereum for ETF shares and vice versa.
This shift aims to comply with SEC regulations, especially Section 6(b) of the Securities Exchange Act of 1934, which is about enhancing open markets while minimizing barriers. It hints at a more efficient market with fewer cash-related restrictions.
If the SEC approves this proposal, it could redefine the blockchain trading platform and the broader cryptocurrency exchange market. It would signal a regulatory shift, possibly allowing for more innovative trading methods and greater acceptance of crypto in traditional finance.
Efficiency and Cost-Effectiveness: For one, it could make ETFs much more efficient. APs could create or redeem ETF shares directly with cryptocurrencies rather than cash, thus avoiding the costly currency conversion.
Tax Efficiency: Plus, the in-kind exchange could reduce taxable events, as long as ownership of the asset remains the same. That would make the investment more tax-friendly.
Liquidity and Price Stability: It might also help keep the ETF’s liquidity intact and align its price more closely with the net asset value of the underlying assets. This is important because it would prevent the price from being affected by selling the assets on public markets.
Market experts view this as a key test for the SEC’s current leadership. Bloomberg ETF analyst James Seyffart said it’s a significant shift away from traditional cash-only ETFs. He believes it could streamline operations and encourage further adoption of crypto assets.
His colleague, Eric Balchunas, pointed out that the SEC’s response will set a major precedent. He suggests that, barring regulatory complications, trading under this new system could start as soon as April.
The filing shows Cboe’s drive to push the limits of the SEC’s regulatory framework. The agency has previously turned down similar requests for spot Solana ETFs, so it will be interesting to see how they react this time, especially with a dedicated SEC crypto task force now in place.
If this proposal is approved, it could create a smoother connection between crypto markets and traditional ETFs. Increased liquidity and potentially more stable prices could follow, along with the emergence of new cryptocurrency exchange platforms.
Operational Requirements: Of course, for in-kind transactions to work, the ETFs must have the operational and security capabilities to handle direct transfers of cryptocurrencies without hiccups.
Global Coordination: The approval in the U.S. could also sync with global efforts to create uniform crypto regulations. Organizations like IOSCO and the FATF are working towards consistent regulations, and what happens here could influence those efforts.
As Cboe waits for the SEC’s ruling, the potential approval of in-kind transactions could redefine operational standards for crypto-based ETFs in the U.S. This could be a big moment for the crypto industry, offering enhanced efficiency, lower costs, and better integration into traditional markets.
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