Cboe Proposes Rule Change to Allow In-Kind ETF Transactions

• Cboe proposes SEC approval for in-kind transactions on ARK Bitcoin and 21Shares Ethereum ETFs to streamline creation and redemption processes.
• Authorized participants will handle Bitcoin and Ethereum transfers for in-kind ETF transactions instead of cash-based redemptions, enhancing market efficiency.
• The SEC decision could establish new rules for ETF operations under the current administration, paving the way for innovative trading mechanisms.

Cboe BZX Exchange Inc. submitted a formal request to the U.S. Securities and Exchange Commission (SEC) on January 27 to permit in-kind creations and redemptions for ARK Bitcoin ETF (ARKB) and 21Shares Ethereum ETF (CETH). The proposal seeks to amend existing rules to allow the exchange of ETF shares for underlying assets such as Bitcoin and Ethereum rather than limiting transactions to cash.

According to the 19b-4 form filed with the SEC, these changes would apply only to authorized participants (APs) who facilitate ETF trades. The proposed rule change does not affect other representations outlined in previous amendments for both Bitcoin and Ethereum ETFs.

Details of the Proposed Mechanism

Cboe’s filing specifies that the ARK Bitcoin Trust and Ethereum Trust will process shares in blocks—5,000 shares for Bitcoin and 10,000 shares for Ethereum—based on the net asset value (NAV) of their respective underlying assets. APs will deliver Bitcoin or Ethereum to create ETF shares and receive the same assets during redemption.

This method aims to align with SEC regulations, particularly Section 6(b) of the Securities Exchange Act of 1934, which focuses on promoting open markets while eliminating operational barriers. By offering in-kind transactions, the ETFs could enhance efficiency and reduce cash-related market constraints.

Analysts Weigh in on the Proposal

Market analysts view this proposal as a test of how far the SEC is willing to go under its current leadership. Bloomberg ETF analyst James Seyffart highlighted that this marks a shift from traditional cash-only ETF structures. He believes these adjustments could streamline ETF operations and encourage broader adoption of cryptocurrency-based assets.

Fellow Bloomberg analyst Eric Balchunas suggested that the SEC’s response will set a critical precedent. He anticipates that barring regulatory objections, trading under the new framework could commence as early as April.

Cboe’s latest filing demonstrates its commitment to pushing boundaries within the SEC’s regulatory framework. Notably, the agency has previously rejected similar proposals for spot Solana ETFs, reflecting a cautious approach toward crypto innovations. However, with a new SEC crypto task force in place, the likelihood of favorable rulings on in-kind transactions has increased.

If approved, the proposed changes could pave the way for a more integrated and efficient connection between crypto markets and traditional ETFs. As Cboe awaits the SEC’s verdict, the outcome could redefine operational standards for cryptocurrency-based ETFs in the U.S.