Bitcoin ETF design enters transition phase as industry rethinks operational foundations

Can the push for in-kind design solve the operational mismatches that have long kept Bitcoin ETFs from functioning like the traditional funds they aim to replicate?

Bitcoin ETF giants push for a cleaner crypto swap model

Late July 2025 saw five major exchange-traded fund providers, Ark 21Shares, Fidelity, Invesco Galaxy, VanEck, and WisdomTree, submit coordinated amendments to the SEC and Cboe BZX Exchange.

The filings advocate a rework in how spot Bitcoin (BTC) and Ethereum (ETH) ETFs are structured. Each firm is seeking to move from a cash-based model to an in-kind creation and redemption mechanism.

Formal rule change notices were published separately on Jul. 22, initiating a public comment period.

Under the existing cash-only model, introduced when spot Bitcoin ETFs were first approved in January 2024, ETF issuers are required to manage transactions through fiat conversions. 

The current approach has been criticized by market participants for raising trading costs and creating misalignment with underlying spot prices.

The in-kind model, by contrast, would allow authorized participants to transfer actual crypto assets in or out of the fund in exchange for ETF shares. Similar structures are already in use in international markets, including Hong Kong’s Bitcoin exchange-traded products.

Approval of the proposed changes could bring U.S.-listed crypto ETFs more in line with established global practices. The shift is expected to improve pricing efficiency and operational transparency within these products.

The SEC’s evolving stance

The SEC has begun to show signs of adopting a more flexible stance toward the structure of crypto exchange-traded funds.

One development took place on Jul. 7, when the agency released a 12-page supervisory framework outlining its expectations for crypto-linked ETFs. The document addressed three main areas: disclosure, custody, and risk management.

ETF issuers were asked to provide more detailed information on how crypto assets are stored and what risks may arise in the process. The goal appears to be standardizing the evaluation criteria for these products.

The same framework also suggested changes to the approval process. Instead of relying on case-by-case exemptions that can take up to 240 days, the SEC proposed using predefined templates that could shorten the timeline to roughly 75 days.

Progress on the regulatory front has been incremental. Applications from BlackRock, Bitwise, and others are still pending while the SEC continues evaluating custody procedures, market safeguards, and anti-money laundering compliance.

Bryan Armour, an ETF analyst at Morningstar, observed that delays reflect the SEC’s caution. His view is that the agency wants to ensure strong investor protections are in place before allowing direct transfers of crypto assets into ETF structures.

James Seyffart of Bloomberg described the recent filings as part of a broader process of refinement between the SEC and the ETF industry. The timing of the submissions suggests that both sides may be converging on shared technical standards and risk controls.

Multiple experts support this reading of events. A post from Bitbo suggested that earlier regulatory resistance to in-kind models stemmed from concerns about money laundering and unregulated intermediaries. 

Deloitte has also noted that several ETF applications submitted in 2023 and 2024 originally included in-kind mechanisms but were changed to cash-only under regulatory pressure. 

Their reintroduction now may signal that prior objections have been resolved.

Why in-kind structure matters

The proposed move from cash-only to in-kind creation and redemption changes how spot Bitcoin ETFs interact with the asset they represent.

Today, when new ETF shares are created or redeemed, they are settled using cash. That means ETF issuers must step into the market to buy or sell Bitcoin on behalf of participants, which introduces trading costs, delays, and execution risks.

In contrast, in-kind creation allows large financial institutions known as authorized participants (APs) to deliver Bitcoin directly to the ETF issuer when creating shares, or receive Bitcoin directly when redeeming them.

The mechanism is already widely used in traditional equity and commodity ETFs and is designed to make the process more cost-efficient, transparent, and operationally smooth.

Applying the structure to Bitcoin ETFs introduces several core benefits that could improve fund performance, investor outcomes, and market efficiency across the board.

Improved execution and reduced market friction

The current cash-based system creates a two-step process: authorized participants deliver cash, and the ETF issuer then executes a market order to buy or sell Bitcoin.

That creates exposure to market fluctuations between the time of cash receipt and asset purchase, leading to slippage and wider bid-ask spreads. 

The inefficiencies are especially evident during volatile trading sessions when liquidity is thin or order books are shallow.

In-kind mechanisms streamline the process. APs can transact directly in Bitcoin, eliminating the need for the ETF to enter the market, reducing the number of intermediaries, simplifying execution, and lowering the risk of price impact.

Enhanced tax efficiency for fund operations

Traditional ETFs rely on in-kind transfers to minimize capital gains distributions to shareholders. When an investor redeems shares, the ETF can transfer out the underlying asset rather than sell it, which avoids triggering a taxable event within the fund.

Bitcoin ETFs using in-kind redemptions would operate under the same logic. When APs redeem shares and receive Bitcoin instead of cash, the transaction does not involve a sale by the fund, which helps prevent internal capital gains.

The tax liability only arises if and when the AP later sells the Bitcoin, improving after-tax returns for investors and helping maintain stable fund net asset value (NAV) over time. That is especially important for long-term holders and institutions managing large allocations.

Stronger arbitrage and price alignment

One of the roles of APs in ETF markets is to keep the ETF price in line with the value of its underlying assets. They do that through arbitrage, buying ETF shares when they’re undervalued and selling when they’re overvalued relative to the actual Bitcoin price.

Cash-based ETFs introduce delays in the process.

Since redemptions involve converting Bitcoin to cash, there is often a timing gap between when APs act and when the fund can reflect the transaction, weakening the arbitrage link and allowing ETF prices to drift away from true net asset value.

In-kind creation and redemption remove the delay. APs can act directly and immediately, exchanging Bitcoin for shares or vice versa, which tightens the link between ETF pricing and the spot market.

As a result, ETF share prices are more likely to mirror real Bitcoin prices throughout the trading day, improving transparency and boosting market confidence.

Final bridge to traditional finance

If approved, in-kind creation and redemption could make Bitcoin ETFs more operationally aligned with the infrastructure that institutional investors already use across traditional asset classes. 

One of the expected outcomes is improved arbitrage efficiency. 

With fewer conversion steps, ETF prices may track Bitcoin’s spot price more closely, strengthening the link between crypto and broader capital markets, particularly as basis trades and hedging strategies become easier to execute across both equity and crypto platforms. 

A Federal Reserve analysis has noted that in-kind mechanisms contribute to lower NAV premiums and tighter bid-ask spreads, especially during periods of market stress.

On a systems level, adoption of in-kind mechanics would indicate that custody and compliance infrastructure for crypto ETFs has reached a level deemed adequate by regulators. 

While retail investors would not redeem shares for Bitcoin directly, they may benefit from narrower spreads and more reliable price tracking as ETF operations become more aligned with institutional norms.

In practical terms, the shift would not introduce new access, but it would adjust how existing access functions. For institutions managing scale, structure often determines usability. In that context, in-kind could make Bitcoin ETFs more usable.