TLDR

• Cboe BZX Exchange has filed a rule change with the SEC to permit in-kind creations and redemptions for Invesco Galaxy Bitcoin and Ethereum ETFs
• In-kind transactions would allow authorized participants to exchange the actual cryptocurrencies directly for ETF shares rather than using cash
• The proposal aims to make the ETFs operate more efficiently by reducing market impact when creating or redeeming shares
• Purchase orders for in-kind creations would need to be placed by 4:00 p.m. Eastern Time, while cash creations maintain a 2:30 p.m. deadline
• The change would potentially benefit end investors through improved efficiency in the ETF creation and redemption process

Cboe BZX Exchange has filed a proposed rule change with the Securities and Exchange Commission (SEC) that would permit in-kind creations and redemptions for the Invesco Galaxy Bitcoin ETF and Invesco Galaxy Ethereum ETF. The filing, dated March 12, 2025, would modify how authorized participants interact with these funds, potentially improving market efficiency.

Currently, both ETFs operate on a cash-only model for creating and redeeming shares. The proposed change would give authorized participants the option to use either cash or the actual cryptocurrencies when trading with the funds.

The rule change would affect ETFs that have been trading on U.S. exchanges since their approval in 2024. The Bitcoin ETF was approved in January 2024, while the Ethereum ETF received regulatory approval in May 2024.

For regular investors who buy ETF shares on the stock exchange, nothing would change. The new option would only apply to authorized participants – the financial institutions that work directly with ETF issuers to create and redeem large blocks of shares.

When creating new ETF shares under the in-kind model, authorized participants would deliver Bitcoin or Ethereum directly to the funds. When redeeming shares, they would receive the cryptocurrencies in return.

Current Cash-Only System

This differs from the current cash-only system where participants must convert between cash and crypto during the creation and redemption process. The cash-only requirement was part of the original conditions set when the SEC first approved these products.

According to the filing, the in-kind option would make the ETFs “operate more efficiently because authorized participants would be able to source bitcoin or ether, as applicable, rather than to provide cash to the applicable Trust.”

Another advantage is that the in-kind process would “potentially lessen the impact on the market of the Trusts on both sides of the transaction.” This happens because the authorized participant would be responsible for buying and selling the underlying crypto assets rather than the Trust itself.

The filing notes that purchase orders for in-kind creations would need to be placed by 4:00 p.m. Eastern Time, while the deadline for cash creations would remain at 2:30 p.m. Eastern Time.

For in-kind redemptions, the process would mirror the creation process. Authorized participants would deliver ETF shares to the Trust and receive the underlying cryptocurrencies in return.

The proposed change follows similar requests from other Bitcoin ETF issuers. Bloomberg ETF analyst James Seyffart previously noted that in-kind transactions should help streamline the ETF market by reducing the number of steps and parties involved in the process.

Despite their innovation, crypto ETFs have faced market challenges recently. Data from Farside Investors shows that Bitcoin ETFs experienced outflows of $371 million on Tuesday, marking seven consecutive days of withdrawals.

Ethereum ETFs have seen similar trends, with outflows of $21.57 million extending to five straight days of withdrawals.

The SEC will review the proposed rule change and has opened a public comment period. The agency can approve the change, disapprove it, or extend the review period for up to 90 days.