The Securities and Exchange Commission (SEC) has announced that it is reviewing a proposal from the Cboe BZX Exchange, Inc. to amend the trading rules for two cryptocurrency-based exchange-traded funds (ETFs): the ARK 21Shares Bitcoin ETF and the 21Shares Core Ethereum ETF.

The proposed rule change would allow in-kind creations and redemptions, providing an alternative to the current cash-only process.

According to the SEC filing, Cboe BZX originally submitted the proposed rule change on January 27, 2025, and subsequently filed amendments on February 5 and February 7, 2025. The proposal seeks to modify previous restrictions that required all ETF creations and redemptions to be conducted exclusively in cash, allowing instead for the direct transfer of Bitcoin and Ethereum in exchange for ETF shares.

Potential Market Impact

The ability to conduct in-kind transactions is seen as a significant shift for the ETFs, potentially improving efficiency for institutional investors. Under the new framework, authorized participants would have the choice of delivering or receiving Bitcoin and Ethereum instead of cash when creating or redeeming ETF shares.

This change, according to Cboe BZX, is expected to reduce market disruptions by shifting the responsibility of acquiring or liquidating cryptocurrency assets from the trust itself to the authorized participants. Proponents argue that this could lessen market volatility and improve liquidity in cryptocurrency markets.

Regulatory Considerations

The SEC is evaluating the proposal under Section 6(b) of the Securities Exchange Act of 1934, which requires exchange rules to promote fairness, prevent fraud, and ensure market stability. The commission will determine within 45 to 90 days whether to approve, reject, or initiate further review of the proposed rule change.

Market analysts note that the approval of in-kind transactions could set a precedent for other cryptocurrency ETFs, making them more comparable to traditional commodity-based ETFs, which often allow in-kind transactions for assets such as gold and silver.

Public Comments and Next Steps

The SEC has invited public comments on the proposed changes, allowing interested parties to submit feedback through electronic or paper filings.

If approved, the rule change could reshape how cryptocurrency ETFs operate in the U.S. market, offering greater flexibility and efficiency for investors looking to trade Bitcoin and Ethereum through regulated financial instruments.