The SEC has approved the introduction of a physical creation and redemption mechanism for cryptocurrency ETPs for the first time, adding a key element to the institutional development of the crypto financial market.
Written by: Fintax
1. Overview of Policies and Background Events
1.1 Overview of SEC Policies
On July 29, 2025, the U.S. Securities and Exchange Commission (SEC) allowed Authorized Participants (APs) to engage in physical creation and redemption of cryptocurrency Exchange Traded Products (ETPs). 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 strike price, expiration date, and exercise style. Furthermore, the SEC expanded the position limit for Bitcoin ETF options from 25,000 contracts to 250,000 contracts, marking a significant shift for U.S. securities regulators in the cryptocurrency space. This not only provides a more relaxed policy environment for ETP issuers, Authorized Participants, and investors but also enhances trading efficiency and market liquidity.
1.2 Differences Between Cryptocurrency ETPs and Traditional ETFs
Exchange Traded Products (ETPs) are investment products listed and traded on national securities exchanges, including Exchange Traded Funds (ETFs), Exchange Traded Notes (ETNs), and Exchange Traded Commodities (ETCs). Cryptocurrency ETPs are typically established in trust form, holding assets composed of spot cryptocurrencies or derivatives anchored to cryptocurrencies. As securities issuers, trusts must register their securities offerings and categories under the Securities Act of 1933 and the Securities Exchange Act of 1934, and are subject to federal securities law anti-fraud provisions.
ETFs are registered under the Investment Company Act of 1940. ETF issuers rely on Authorized Participants to create and redeem ETF shares in exchange for securities or baskets 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 must 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, while ETFs also need to submit annual audited financial statements (Form N-CSR), they only need to submit semi-annual financial statements additionally.
2. Evolution of Cryptocurrency ETP Regulation in the U.S.
2.1 Development History of Cryptocurrency ETPs
Since the Winklevoss twins first submitted a Bitcoin ETF application to the 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 U.S.: ProShares Bitcoin ETF (BITO). Following 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 D.C. Circuit Court of Appeals granted the applicant's appeal and overturned the SEC's previous rejection decision. Shortly thereafter, the SEC approved the listing of futures Ethereum ETPs in October 2023. This ruling also paved the way for the final approval of spot Bitcoin ETPs 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 they would adopt a physical creation and redemption model. However, during the SEC's comment period, all applications were revised to adopt only cash creation and redemption. Prior to this approval, all applications for spot Bitcoin ETPs had failed 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 various spot Ethereum ETPs. The cash creation and redemption model was also extended to spot Ethereum ETPs.
2.2 Latest Regulatory Developments for Cryptocurrency ETPs
2.2.1 SEC Releases New Disclosure Guidelines for Cryptocurrency ETPs
On July 1, 2025, the SEC's Division of Corporation Finance released new disclosure guidelines for cryptocurrency ETPs, aimed at providing clear guidance for the issuance and registration of cryptocurrency ETPs under the federal securities law framework, promoting the standardized operation of the market.
The guidelines state that cryptocurrency ETP issuers must complete the required disclosures related to product issuance and registration in accordance with the U.S. Securities Act and Securities Exchange Act. 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, and more.
In the short term, these guidelines may suppress the issuance of some products with insufficient information disclosure, prompting investors to reassess risk premiums, leading to pressure on ETP products facing capital outflows. In the long term, this move will accelerate the application and implementation of leading institutional products, reduce regulatory uncertainty and compliance costs, and create a more mature and orderly cryptocurrency investment ecosystem.
2.2.2 Exchanges Promote Universal Listing Standards for Cryptocurrency ETPs
Notably, in addition to making a key step in the operational model of cryptocurrency ETPs, their listing channels are also expected to be significantly optimized.
Cboe BZX, Nasdaq, and NYSE Arca have submitted a significant rule amendment proposal to the SEC. The proposal aims to establish universal listing and trading standards for commodity trust stocks, intending to expedite the approval process for public trading of such products. Under current rules, exchanges must submit Form 19b-4, triggering a review period of up to 240 days. The proposed framework could shorten this time, institutionalizing and standardizing the "one coin, one review" listing process. This will help significantly simplify the listing process, reduce issuance costs, and open up efficient and transparent listing channels for commodity ETPs, including cryptocurrency assets.
3. Industry Significance of the Physical Creation and Redemption Mechanism
3.1 Comparison of Physical and Cash Creation and Redemption Mechanisms
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) create ETP shares, they must first provide cash to the issuer, which then purchases Bitcoin or Ethereum in the spot market. Upon redemption, the issuer must first sell the cryptocurrency to obtain cash, which is then delivered to the Authorized Participants.
The physical creation and redemption model allows Authorized Participants to directly deliver real Bitcoin or Ethereum to the ETP issuer to create new shares. Upon redemption, the ETP issuer can directly deliver the corresponding cryptocurrency to the Authorized Participants. Therefore, the issuer does not need to manage large cash flows and cryptocurrency flows and can complete complex buy-sell operations in a short time.
3.2 Positive Impact on the Cryptocurrency Market
The physical creation and redemption mechanism has significant advantages in controlling trading costs and slippage, reducing potential tax burdens, improving asset pricing efficiency, and enhancing market liquidity.
(1) Trading Costs and Slippage: Cash creation and redemption are accompanied by large-scale cryptocurrency sales, leading to accumulated trading fees and slippage during bulk transactions. Applying the physical creation and redemption model to cryptocurrency ETPs can reduce trading friction and provide greater flexibility for issuers and market makers.
(2) Tax Burden: According to IRS regulations, when converting cryptocurrency to fiat currency involving capital gains tax, investors need to calculate capital gains or losses by subtracting their cost basis from the sale price and pay the corresponding capital gains tax. Cash creation and redemption correspond to the buying and selling of cryptocurrency, thus increasing tax complexity and bringing potential capital gains tax burdens, which often get passed on to investors. The physical creation and redemption model allows investors to defer the occurrence of capital gains until sale, providing more flexible tax arrangements.
(3) Pricing Efficiency: Cash creation and redemption can lead to discrepancies between the market price of ETPs and their net asset value, especially during periods of high market volatility, resulting in premiums or discounts. Large-scale cash creation and redemption may also cause issuers to frequently adjust their asset portfolios, leading to price fluctuations of ETPs. The physical creation and redemption mechanism helps maintain the alignment of ETP prices with their net asset values, improving pricing efficiency and ensuring fairness and transparency in trading prices.
(4) Market Liquidity: The physical creation and redemption model is commonly used in traditional stock and ETP markets. The shift in the creation and redemption model will place cryptocurrency ETPs in the same operational state as traditional commodity ETPs, expanding the accessibility and scope of cryptocurrency derivative financial products, thereby facilitating traditional industry institutions to invest in the cryptocurrency space.
As Bloomberg analyst James Seyffart pointed out, by approving the physical creation and redemption process for Bitcoin and Ethereum ETFs, the SEC has paved the way for future altcoin (such as those based on Solana, XRP, etc.) ETF physical creation and redemption models.
4. Conclusion
The SEC's first approval of the introduction of a physical creation and redemption mechanism for cryptocurrency ETPs adds a key element to the institutional development of the crypto financial market. Physical creation and redemption align the circulation logic of cryptocurrency assets more closely with traditional ETFs, providing a mature pathway for institutional funds to enter the market compliantly.
At the same time, regulators are accelerating the improvement of supporting systems. The SEC's latest disclosure guidelines for cryptocurrency ETPs clearly outline the registration and information disclosure requirements for related products under the federal securities law framework, providing clearer compliance references for issuers and investors.
The actions on the exchange side are also noteworthy. Cboe BZX, Nasdaq, and NYSE Arca have submitted rule amendment proposals to the SEC, planning to establish universal listing standards for commodity trust stocks to simplify the listing approval process for cryptocurrency ETPs. If this reform is implemented, it is expected to address the longstanding issues of "difficult queuing and slow approvals," significantly enhancing market efficiency and transparency.
Overall, whether it is the physical creation and redemption mechanism or the new disclosure regulations on the policy side, they point to a clear trend: cryptocurrency assets are accelerating towards a clearer, more regulated, configurable, and highly integrated development stage 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 focus solely on product design but will center on who can first find the best balance between compliance and risk control, building a robust and sustainable cryptocurrency investment system.
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