Securities and Exchange Commission (SEC) permits Exchange-Traded Funds (ETFs) to redeem shares with cryptocurrency, which could potentially increase banks' indirect crypto holdings.

Securities and Exchange Commission (SEC) permits Exchange-Traded Funds (ETFs) to redeem shares with cryptocurrency, which could potentially increase banks' indirect crypto holdings.

The United States Securities and Exchange Commission (SEC) has made a significant move in the world of cryptocurrency, voting to allow in-kind creations and redemptions for crypto asset exchange-traded product (ETP) shares. This regulatory change is expected to make crypto ETP markets more efficient and closely integrated with traditional financial infrastructure.

The decision aligns with the standard practices for similar ETPs, such as those based on commodities. Previously, all crypto ETPs were settled in cash, a practice that added significant transaction costs and exposed banks to more market risk. With in-kind transfers, banks can handle shares by exchanging actual bitcoin or ether rather than cash, improving operational efficiency and reducing the burden on banks’ trading desks.

This change is particularly beneficial for ETF issuers, who can now receive crypto directly rather than purchasing it on the open market. The SEC portrayed the move as providing efficiencies and cost savings for ETF issuers. BlackRock's $87 billion iShares Bitcoin Trust (iBIT) is the market leader among US crypto ETFs, and the growth of iBIT linked options indicates a growing interest in crypto ETPs. This year, iBIT linked options have grown almost threefold to around $34 billion.

The relaxation of rules by the SEC also allows for expanded options exposures in certain bitcoin ETPs, which could lessen the operational and trading burdens on banks involved as authorized participants or market makers for these products. This regulatory shift may spur more active market-making and increase demand for crypto ETP shares, potentially boosting banks’ transaction revenues and market involvement in crypto asset products.

The growth in the average daily volume of iBIT linked options this month, at 51 million contracts, is a testament to the increased interest in crypto ETPs. Seven of the dozen authorized participants for iBIT are linked to banks, including ABN AMRO, BMO, Bank of America, Citigroup, Goldman Sachs, JP Morgan, and UBS.

The total indirect US bank exposures to crypto assets, as classified by bank regulators, amounted to €5.8 billion ($6.7bn) by mid 2024, according to the Basel Committee. However, Basel crypto rules for banks make direct crypto trading somewhat financially unattractive. The SEC's changes encourage banks to engage more directly in spot crypto trading, which could potentially increase these exposures.

SEC Chairman Paul Atkins stated that the change will lead to a deeper and more dynamic market, benefiting all American investors. This move is expected to make ETPs less costly and more efficient, potentially attracting more investors to the crypto market. As of the article, US crypto ETFs have around $183 billion in assets under management, a figure that is likely to grow with these regulatory changes.

1. The change in rules by the SEC enables banks to handle crypto ETP shares more efficiently, as they can now exchange actual bitcoin or ether, reducing transaction costs and market risk compared to cash settlement.
2. By relaxing rules for crypto ETPs, the SEC has opened up opportunities for market-making, potentially boosting banks’ transaction revenues and their market involvement in crypto asset products.
3. With the SEC's decision, ETF issuers can now receive crypto directly, lowering costs and increasing potential attractiveness for investors, which could lead to growth in the assets under management for US crypto ETFs.

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