SEC approves crypto ETF redemptions in-kind, impacting bank indirect exposures

The US Securities and Exchange Commission (SEC) made a significant decision to allow in-kind creations and redemptions of cryptocurrency exchange traded product (ETP) shares. This move comes after the approval of the first spot Bitcoin ETFs in January 2024, marking a shift from cash settlements for all crypto ETFs. The SEC sees this change as a way to provide efficiencies and cost savings for ETF issuers by enabling them to receive cryptocurrencies directly rather than purchasing them on the open market. The decision is expected to lead to increased involvement of banks with cryptocurrencies, given that ETF issuers can now receive crypto assets in-kind.

SEC Chairman Paul Atkins emphasized the importance of developing a regulatory framework suited for crypto asset markets. He stated that the recent approvals aim to create a rational regulatory structure for crypto, ultimately benefiting all American investors. The decision to allow in-kind redemptions aligns with standard practices for similar ETPs, according to the SEC.

The ETF Database reports that US crypto ETFs have amassed approximately $183 billion in assets under management, with BlackRock’s iShares Bitcoin Trust (iBIT) holding a substantial portion of this market share with $87 billion. The onboarding process for ETFs typically involves authorized participants, where seven out of the twelve participants for iBIT are affiliated with major banks such as ABN AMRO, BMO, Bank of America, Citigroup, Goldman Sachs, JP Morgan, and UBS.

Bank regulators view authorized participants as having ‘indirect exposures’ to cryptocurrencies since they manage crypto assets on behalf of clients. As of mid-2024, indirect exposures from US banks amounted to €5.8 billion ($6.7bn) as reported by the Basel Committee. The decision to allow in-kind redemptions may have a substantial impact on these indirect exposures, encouraging banks to engage more directly in spot crypto trading. However, Basel crypto rules for banks may pose financial challenges given the requirement to sell crypto assets on behalf of clients who opt for cash redemption.

In addition to in-kind redemptions, the SEC has relaxed certain rules, permitting mixed spot and derivatives-based ETFs and expanding options exposures. The position limits for certain options related to bitcoin ETPs have been increased to 250,000, with iBIT linked options having tripled to approximately $34 billion this year. The average daily volume of contracts stands at 51 million, signaling growing interest in crypto options trading.

The decision by the SEC to approve in-kind redemptions for crypto ETPs not only streamlines the process for ETF issuers, providing efficiencies and cost savings but also has broader implications for bank indirect exposures to cryptocurrencies. This move is part of an ongoing effort to establish a regulatory framework conducive to the growth and diversification of the crypto asset market, ultimately benefiting American investors.