Nasdaq Proposes Rule Change to Introduce 'In-Kind' Bitcoin Creation and Redemption for ETFs, Targeting BlackRock's iShares Bitcoin Trust

Nasdaq has taken a decision on Bitcoin ETFs, particularly aimed at BlackRock's iShares Bitcoin Trust IBIT, that may make existing and potential Bitcoin

The U.S. Securities and Exchange Commission (SEC) has taken a step toward approving in-kind creations and redemptions for Bitcoin exchange-traded funds (ETFs), a move that could pave the way for the ETF to begin trading.

Nasdaq filed a proposal on Jan. 24 with the SEC to introduce in-kind creations and redemptions for Bitcoin ETFs. The proposal seeks to amend the existing rule for authorized participants (APs) to redeem ETF shares directly for Bitcoin.

Currently, authorized participants are required to redeem ETF shares for cash, which is then used to purchase Bitcoin for in-kind creations. This process will be streamlined with the proposed change, eliminating the need for an additional step and reducing the cost and operational inefficiencies.

Authorized participants are typically large financial institutions that create and redeem ETF shares, and while retail investors are not directly eligible to participate in in-kind redemptions, the streamlined process could enhance efficiency and potentially reduce overall costs, indirectly benefiting retail market participants.

When the SEC first approved spot Bitcoin ETFs in January 2024, including BlackRock’s iShares Bitcoin Trust, cash redemption was made mandatory. This was part of the effort to ensure regulatory simplicity and minimize direct handling of Bitcoin by brokers.

However, the swift growth of the Bitcoin ETF market, together with advancements in the digital asset ecosystem, set the ground for a more efficient operational model. The in-kind redemption system was designed as these evolving market dynamics took shape, aiming to accommodate growing institutional interest in cryptocurrency.

BlackRock’s iShares Bitcoin Trust has been a massive success story since its debut, attracting nearly $60 billion in inflows within its first year. This underscores the strong institutional demand for Bitcoin-linked ETFs.

Moreover, large investors have boosted Bitcoin prices since the U.S. election, increasing their holdings from 16.2 million to 16.4 million BTC, according to CryptoQuant.

Nasdaq’s proposal could further solidify iShares Bitcoin Trust's position as a market leader by being the first to offer a redemption model that aligns with the needs of institutional investors.

James Seyffart, an ETF analyst at Bloomberg Intelligence, brought attention to the regulatory hurdles that initially delayed the adoption of in-kind redemption models.

“Nasdaq is finally filing for in-kind creations and redemptions for Bitcoin ETFs, which were initially expected to be included in the SEC’s approval of spot Bitcoin ETFs. However, the SEC opted for cash creations and redemptions to simplify the regulatory approval process. Now, the SEC is expected to approve in-kind creations and redemptions, which will be a key development for Bitcoin ETFs.”

If approved by the SEC, Nasdaq’s proposal will mark a significant step in the evolution of Bitcoin ETFs, making them more efficient andoperable, and able to attract more institutional investors.