The US SEC approves the physical redemption of cryptocurrency ETPs, bringing favourable information to the crypto finance sector.

Written by: Fintax

1. Policy Overview and Event Background

1.1 Overview of SEC Policies

On July 29, 2025, the U.S. Securities and Exchange Commission (SEC) allowed Authorized Participants (APs) to make physical purchases and redemptions of Exchange Traded Products (ETPs) related to cryptocurrency. Additionally, the SEC approved a new model for trading spot Bitcoin ETF options. This includes the introduction of Flexible Exchange Options (FLEX) and customizable derivatives, giving market participants more say in contract features such as exercise price, expiration date, and exercise style. Furthermore, the SEC expanded the position limit for Bitcoin ETF options from 25,000 contracts to ten times that amount, or 250,000 contracts. This move marks a significant shift by U.S. securities regulators in the cryptocurrency space, providing a more relaxed policy environment for ETP issuers, Authorized Participants, and investors, while also enhancing trading efficiency and market liquidity.

1.2 Differences Between Cryptocurrency ETP and Traditional ETF

Exchange-Traded Products (ETPs) are investment products that are listed and traded on national securities exchanges, including Exchange-Traded Funds (ETFs), Exchange-Traded Notes (ETNs), and Exchange-Traded Commodities (ETCs). Crypto asset ETPs are typically established in the form of trusts, holding assets composed of spot crypto assets or derivative instruments tied to crypto assets. The trust acts as the issuer of securities, registering its securities and categories in accordance with the Securities Act of 1933 and the Securities Exchange Act of 1934, and is subject to the anti-fraud provisions of federal securities laws.

ETFs are registered under the Investment Company Act of 1940. The issuers of ETFs rely on authorized participants to create and redeem ETF shares in exchange for securities or a basket of securities tracked by the ETF. Authorized participants then trade ETF shares on the exchange (i.e., the secondary market).

The reporting requirements for ETPs differ from those for ETFs. ETPs are required to submit annual audited financial statements (Form 10-K) and quarterly financial statements (Form 10-Q), consistent with the requirements for traditional companies listed on U.S. stock exchanges. In contrast, although ETFs are also required to submit annual audited financial statements (Form N-CSR), they only need to submit additional semi-annual financial statements.

2. Evolution of US Cryptocurrency Asset ETP Regulation

2.1 Development History of Encrypted Asset ETP

Since the Winklevoss twins first submitted a Bitcoin ETF application proposal to the U.S. SEC in 2013, multiple issuers have attempted to obtain permission to create Bitcoin ETFs, but U.S. regulators have rejected various attempts.

In October 2021, the SEC approved the first Bitcoin futures ETF in the United States: ProShares Bitcoin ETF (BITO). After the approval of this futures ETF, the SEC faced a court lawsuit regarding the conversion of over-the-counter (OTC) Bitcoin spot products into ETPs.

On August 29, 2023, the U.S. Court of Appeals for the District of Columbia Circuit granted the applicant's appeal request and overturned the SEC's previous denial decision. Shortly thereafter, the SEC approved the listing of a futures Ethereum ETP in October 2023. This ruling also paves the way for the final approval of a spot Bitcoin ETP in January 2024.

On January 10, 2024, the SEC approved the listing and trading of multiple spot Bitcoin ETPs. Initially, most spot Bitcoin ETP applications indicated that they would use physical creation and redemption. However, during the SEC's comment period, all applications were revised to use cash creation and redemption only. Prior to this approval, all applications for spot Bitcoin ETPs were rejected due to investor protection issues, potential risks of price manipulation, and a lack of monitoring-sharing agreements with larger regulated Bitcoin markets.

On May 23, 2024, the SEC approved changes to exchange rules, allowing the listing and trading of multiple spot Ethereum ETPs. The cash subscription and redemption model has also been extended to spot Ethereum ETPs.

2.2 Latest Regulatory Developments of Crypto Asset ETPs

2.2.1 SEC Releases New Guidelines for Disclosure of Crypto Asset ETPs

On July 1, 2025, the U.S. SEC's Division of Corporation Finance issued new guidelines for the disclosure of crypto asset ETPs, aimed at providing clear guidance for the issuance and registration of crypto asset ETPs under the federal securities law framework, promoting the orderly functioning of the market.

The guideline states that the issuer of the cryptocurrency asset ETP must comply with the requirements of the U.S. Securities Act and the Securities Exchange Act, completing the product issuance and registration-related information disclosure as required. This includes risk factors, business descriptions, service providers of the trust, custody of trust assets, fees and expenses, securities descriptions, distribution plans, management, conflicts of interest, financial statements, etc.

In the short term, this guideline may suppress the issuance of some products with insufficient information disclosure, prompting investors to reassess risk premiums, leading to pressure on ETP products to experience capital outflows. In the long term, this move will accelerate the application and launch of top-tier institutional products, reduce regulatory uncertainty and compliance costs, and create a more mature and orderly investment ecosystem for crypto assets.

2.2.2 Exchange Promotes General Listing Standards for Crypto ETPs

It is noteworthy that, in addition to the key step taken in the operation model of crypto ETPs, its listing channel is also expected to receive significant optimization.

The Chicago Board Options Exchange BZX (Cboe BZX), Nasdaq, and NYSE Arca, Inc. have submitted a significant rule amendment proposal to the SEC. The proposal aims to establish universal listing and trading standards for commodity trust shares, intended to expedite the approval process for public trading of such products. Under current rules, exchanges must submit a 19b-4 form, triggering a maximum 240-day review period. The proposed framework could shorten this timeframe, institutionalizing and standardizing the "one coin, one review" listing process. This would greatly simplify the listing process, reduce issuance costs, and open up an efficient and transparent listing channel for commodity ETPs, including crypto assets.

3. The Industry Significance of the Physical Redemption Mechanism

3.1 Comparison of the Mechanisms of Physical Redemption and Cash Redemption

Before this approval, spot Bitcoin and Ethereum ETPs in the U.S. market were required to adopt a cash creation and redemption model. This means that when authorized participants (typically traditional giants like Goldman Sachs, JPMorgan, or professional market makers) subscribe to ETP shares, they must first provide cash to the issuer, who then purchases Bitcoin or Ethereum on the spot market. Upon redemption, the issuer must first sell the crypto assets to exchange for cash, which is then delivered to the authorized participants.

The physical redemption model allows authorized participants to directly deliver real Bitcoin or Ethereum to the ETP issuer to purchase new shares. Upon redemption, the ETP issuer can directly deliver the corresponding crypto assets to authorized participants. Therefore, the issuer does not need to manage large amounts of cash flow and crypto asset flow, and can complete complex buying and selling operations in a short time.

3.2 Positive Impact on the Cryptocurrency Market

Physical redemption has significant advantages in controlling trading costs and slippage, reducing potential tax burdens, improving asset pricing efficiency, and enhancing market liquidity.

(1) Transaction Costs and Slippage: Cash creation and redemption is accompanied by large-scale sales of crypto assets, leading to accumulated transaction fees and slippage during large trades. Applying a physical creation and redemption model to crypto ETPs can reduce trading friction and provide greater flexibility for issuers and market makers.

(2) Tax Burden: According to IRS regulations, when converting cryptocurrency into fiat currency involving capital gains tax, investors need to subtract their cost basis from the selling price to calculate capital gains or losses and pay the corresponding capital gains tax. Cash redemption corresponds to the buying and selling of crypto assets, thus increasing tax complexity and potentially creating capital gains tax liabilities, which often end up being passed on to investors. The physical redemption model allows investors to defer the occurrence of capital gains until the sale, providing more flexibility in tax arrangements.

(3) Pricing Efficiency: Cash creation and redemption can lead to discrepancies between the market price of an ETP and its net asset value, especially during periods of high market volatility, resulting in premiums or discounts. Large amounts of cash creation and redemption may also cause the issuer to frequently adjust its asset portfolio, leading to price fluctuations of the ETP. Physical creation and redemption help maintain the alignment of the ETP price with its net asset value, improve pricing efficiency, and uphold the fairness and transparency of trading prices.

(3) Market Liquidity: The physical creation and redemption model is generally adopted in traditional stock and ETP markets. The shift in the redemption model will place crypto asset ETPs in the same operational status as traditional commodity ETPs, expanding the accessibility and range of crypto derivatives financial products, which in turn will help traditional industry institutions invest in the crypto space.

As pointed out by Bloomberg analyst James Seyffart, by approving the physical redemption process for Bitcoin and Ethereum ETFs, the SEC has paved the way for future physical redemption models for altcoin ETFs (such as those based on Solana, XRP, etc.).

4. Conclusion

The SEC has approved the introduction of a physical redemption mechanism for cryptocurrency ETPs for the first time, adding a crucial element to the institutional framework of the cryptocurrency financial market. Physical redemption makes the circulation logic of cryptocurrency assets closer to traditional ETFs, providing a mature path for institutional funds to enter the market in compliance.

At the same time, regulators are accelerating the improvement of supporting systems. The SEC's latest guidance on the disclosure of cryptocurrency asset ETPs clarifies the registration and information disclosure requirements for related products under the federal securities law framework for the first time, providing issuers and investors with clearer compliance references.

The actions on the exchange side are also worth paying attention to. Cboe BZX, Nasdaq, and NYSE Arca have submitted rule change proposals to the SEC, planning to establish universal listing standards for commodity trust stocks to simplify the listing approval process for crypto ETPs. If this reform can be implemented, it is expected to address the long-standing issues of "difficult queuing and slow approval" and significantly enhance market efficiency and transparency.

Overall, whether it is the physical redemption at the mechanism level or the new disclosure regulations at the policy end, they all point to a clear trend: cryptocurrency assets are accelerating towards a development stage that is clearer, more regulated, configurable, and highly integrated with traditional financial operating logic. The market's direction is shifting from defensive regulation to proactive embrace, from speculation-driven to value allocation. Future competition may no longer be limited to product design but will focus on who can be the first to find the best balance between compliance and risk control, building a robust and sustainable cryptocurrency investment system.