Some of the most interesting filings in the crypto ETF space are not necessarily new product filings. Potential approval of litecoin and XRP ETFs have stolen the headlines, in addition to some “creative” filings like dogecoin, Trump coin, and other meme coin ETFs. Recently however, there have also been several filings to make amendments to existing crypto products. These have flown relatively under the radar. They include potential in-kind redemptions in spot crypto ETFs and potential staking in spot ether ETFs.
In-Kind Redemptions in Crypto ETFs
Recently, Nasdaq filed a proposal with the SEC to allow in-kind Bitcoin redemptions in addition to cash redemptions for the iShares Bitcoin Trust ETF (IBIT). This was followed by a similar filing by the CBOE for the ARK 21Shares Bitcoin ETF (ARKB) and the 21Shares Core Ethereum ETF (CETH). One of the main reasons ETFs are so popular with investors is due to the in-kind creation redemption process. This contributes to their tax efficiency and liquidity. When spot bitcoin ETFs were launched in January 2024, they were approved only for cash redemptions, partly to keep bitcoin out of the hands of authorized participants (AP), due to regulatory concerns. To keep this short, I won’t go into the details of in kind versus cash creation redemption process. For more resources on this process, see these reports by State Street Global Advisors, Charles Schwab Asset Management, and ProShares. Essentially, the cash creation/redemption process adds an extra step of converting between cash and bitcoin with an additional liquidity provider. This way, the AP does not need to “touch” bitcoin.
Grayscale filed a great resource last year — the slide deck discusses some of the benefits of in-kind redemptions, including supporting a deeper, more robust primary market. According to Grayscale, only 15 exchange-traded products are physically-backed commodity funds (not including spot crypto ETFs). All of these use in-kind redemptions. The majority of equity funds also use an in-kind process.
Implications for Investors
It is a common misconception, but in-kind redemptions do not extend to retail investors. So, if you bought and sold shares of IBIT in your brokerage account, you wouldn’t be able to receive any bitcoin in return. Still, this has the potential to create more efficiency and liquidity in the market, as more institutional investors adopt these products. It’s also another step into bringing these crypto ETFs deeper into the mainstream. Last year, IBIT was the third largest ETF by inflows, next to only domestic large-cap heavyweights, the Vanguard S&P 500 ETF (VOO) and the iShares Core S&P 500 ETF (IVV). In-kind redemptions, along with other characteristics, like recent options trading on select spot bitcoin products, contribute to integrating and aligning these products closer to the financial markets and their ETF counterparts.
Staking in Ether ETFs
Staking was another somewhat controversial proposal during the spot ether ETF launch. It is a way of earning extra rewards by holding ethereum. (This is similar to earning interest or dividends, with a few caveats.) As many ether investors know, staking has become a key feature of ether. It was left out of spot ether ETFs because it resembles unregistered securities offerings. On February 12, the CBOE filed a 19b-4 proposal on the behalf of 21Shares to add staking to its 21Shares Core Ethereum ETF (CETF). Soon after, on February 14, the NYSE filed, on behalf of Grayscale, a proposal to add staking to its two ether products — the Grayscale Ethereum Trust ETF (ETHE) and the Grayscale Ethereum Mini Trust ETF (ETH).
Both filings cite the potential use of “point-and-click” staking as a potentially safer method of earning rewards. This process does not involve the staked ether leaving the wallet, which reduces risk of theft.
Implications for Investors
Staking comes with the potential for additional yield for both retail and institutional clients. Allowing staking in these products more closely aligns the investment with direct ether investment. It also improves efficiency and the creation redemption process. Additionally, this would align the U.S. with other countries which have ethereum staking ETPs — for example, the 3iQ Ether Staking ETF (TSX: ETHQ) and the 21Shares Ethereum Staking ETP (SWX: AETH).
Bottom Line
Keeping track of new crypto product filings has been exciting — especially with the potential for new spot products like litecoin, XRP, solana, and even several more obscure coins. But there is also a maturation of the current crypto framework supporting products belonging to iShares, Grayscale, and more. That maturation could propel the industry forward in terms of efficiency, liquidity, and reputation.
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