Bitcoin, Ethereum Spot ETF launches physical subscription and redemption transformation

Source: bitcoinist

The U.S. Securities and Exchange Commission (SEC) is gradually advancing structural reforms for Bitcoin and Ethereum ETFs. Previously, five products listed on the Chicago Board Options Exchange (Cboe) BZX simultaneously applied to change their cash-only redemption model to a physical redemption mechanism, which has long been widely used in commodity and stock ETFs.

The documents submitted later on July 22 cover the ARK 21Shares Bitcoin ETF and the 21Shares Core Ethereum ETF (included in SR-CboeBZX-2025-010 Amendment No. 3), the WisdomTree Bitcoin Fund (SR-CboeBZX-2025-033 Amendment No. 1), as well as the Fidelity Wise Origin Bitcoin Fund and the Fidelity Ethereum Fund (SR-CboeBZX-2025-023 Amendment No. 1).

Each amendment modified the provisions regarding cash subscription and redemption of mandatory trusts in the approved documents from early 2024, replacing it with the phrase "cash or physical transactions," and added detailed settlement processes for the direct transfer of Bitcoin or Ethereum between the trust custodian and authorized participants.

Bloomberg ETF analyst James Seyffart was the first to discover this coordinated action. He informed his followers on the X platform that these 5 documents are "another positive signal that Bitcoin and Ethereum ETFs are likely to gain physical redemption privileges... This indicates that positive progress is being made internally at the SEC, and details may be undergoing adjustments."

To avoid misunderstandings, he added, "No, this is not intended for retail or ordinary investors to exchange ETF shares for the underlying assets, and vice versa. This is only applicable to authorized participants (i.e., large Wall Street institutions and market makers)... This will enhance the efficiency of existing and future cryptocurrency ETFs. But the vast majority of people won't even notice the difference, as the products currently on the market already have extremely high trading efficiency. This adjustment will allow cryptocurrency ETPs to be treated equally with other ETPs."

When discussing whether retail investors will be able to use a physical redemption process in the future, Seyffart added: "If consumers can exchange ETF shares for actual ETH at a specific threshold, it will be very meaningful. I personally believe that such a redemption mechanism will eventually be realized, but it may take a long time. Step by step, some gold ETFs have already achieved this."

In January 2024, when the Bitcoin spot ETP was approved, the SEC mandated a cash creation and redemption model: Authorized participants inject USD into the fund, which then purchases cryptocurrencies in the spot market; the reverse operation occurs during redemption. Although this design alleviates SEC Chairman Gensler's concerns about custody and settlement risks, it introduces two major issues: the trust itself must participate in trading the underlying assets; and when spot liquidity is insufficient, the fund's net asset value (NAV) may deviate from the share price.

The physical redemption mechanism returns trading control to authorized participants: when purchasing shares, authorized participants directly transfer Bitcoin or Ethereum to the fund's cold wallet; upon redemption, they receive cryptocurrency instead of cash.

This structure is a standard model throughout the ETF ecosystem, which can narrow the bid-ask spread, reduce imbalances in the primary market, and bring significant tax advantages, as the underlying securities (in this case, crypto assets) are transferred in "physical" form without needing to be sold within the fund to realize capital gains. The SEC itself has also pointed out that ETFs "may be more tax efficient... because ETF shares can usually be redeemed in 'kind'."

The commodity trust that has adopted physical redemption provides a regulatory model for cryptocurrency issuers. For example, the SPDR Gold ETF allows authorized participants to exchange 100,000 shares of the fund for physical gold, ultimately enabling individual investors to "obtain the right to hold the physical gold corresponding to their shares through arrangements facilitated by brokers." Bitcoin and Ethereum trusts, by referencing such statements, claim that they only seek equal regulatory treatment with existing commodity ETPs.

As the trading volume in the primary market increases, operational pressure is also becoming more prominent.

Since their launch, the 11 Bitcoin spot ETFs approved in 2024 have accumulated net inflows of nearly $55 billion; the market-making department needs to raise tens of billions of dollars by 4 PM on each settlement day to close their hedged positions after the trust completes the cryptocurrency purchases. This not only occupies the balance sheet but also widens the spread during volatile periods. Once physical delivery is allowed, the market-making department can continuously acquire or hedge Bitcoin and Ethereum, and directly transfer assets to the trust wallet on T+0 days.