What's Happening?
The SEC has announced a significant policy shift, permitting in-kind creations and redemptions for crypto exchange-traded products (ETPs). This aligns crypto ETPs with traditional ETF structures, reducing operational friction and potential tax inefficiencies. Historically, crypto funds processed redemptions in cash due to custody and volatility concerns. The new policy allows authorized participants to exchange underlying crypto assets directly, provided compliance with the Investment Company Act is maintained.
Why It's Important?
This policy shift represents a pragmatic recognition of the maturing crypto market infrastructure. By aligning crypto ETPs with traditional ETF mechanics, the SEC reduces operational barriers and tax inefficiencies, potentially enhancing fund performance. However, legal teams must ensure robust compliance protocols to meet SEC expectations, particularly for multi-crypto ETPs. The change signals the SEC's willingness to modernize its approach, though it remains cautious about extending these privileges beyond bitcoin and ether.
What's Next?
Firms and general counsel should stay alert for further SEC guidance and continue standard compliance practices while tracking new developments. Engaging proactively with the SEC’s Crypto Task Force and reviewing regulatory releases will be essential for staying ahead in this evolving space. As the SEC's posture shifts, legal counsel will play a critical role in risk management and strategic decision-making for digital asset products.
Beyond the Headlines
The SEC's expanded focus on market manipulation and liquidity risks gives the agency greater latitude to slow or deny applications. This means procedural delays may exist until more specific guidance emerges, requiring sponsors and counsel to prepare for continued case-by-case treatment. The lack of clear criteria for new ETPs underscores the need for strong compliance systems.
