Cboe BZX Exchange Files a Proposed Rule Change with the SEC That Would Permit in-Kind Creations and Redemptions for the Invesco Galaxy Bitcoin ETF and Invesco Galaxy Ethereum ETF

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 Securities and Exchange Commission (SEC) is reviewing a proposed rule change from Cboe BZX Exchange that would permit in-kind creations and redemptions for the Invesco Galaxy Bitcoin ETF (BTC) and Invesco Galaxy Ethereum ETF (ETH).

The proposal, filed on Monday, March 12, modifies the procedures for authorized participants to interact with the ETFs, which could improve market efficiency.

The proposed rule change concerns the two flagship crypto ETFs that launched in early 2024.

The Bitcoin ETF was the first to receive regulatory approval, with the SEC granting its approval in January 2024. Shortly after, the Commission also approved the Ethereum ETF, marking a significant milestone in the U.S. crypto market.

Both ETFs began trading on U.S. exchanges in February 2024.

The new option would allow authorized participants to choose between using cash or the actual cryptocurrencies when trading with the funds.

The rule change would apply to authorized participants, who are financial institutions that work directly with ETF issuers to create and redeem large blocks of shares.

Regular investors who buy ETF shares on the stock exchange would not be affected by the proposed change.

The proposed in-kind option provides an alternative to the current cash-only model.

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

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, extending seven consecutive days of withdrawals.

The trend continues a recent pattern of institutional outflows from crypto products.

Ethereum ETFs also saw outflows, with inflows 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.