SEC Relaxes! Crypto ETF "Physical Redemption" Opens Up, a Key Step into Mainstream

We have learned from Jingtong Finance APP that the US regulatory agency has approved a key process, making cryptocurrency exchange-traded products (ETPs) more consistent with traditional similar products, further demonstrating digital assets' gaining mainstream recognition. On Tuesday, the US Securities and Exchange Commission (SEC) authorized cryptocurrency ETFs to adopt a "physical redemption" mechanism - a significant shift from the previous requirement of "cash-only" mode.

Cash redemption and physical redemption may seem like a trivial difference at first glance, but have become hot topics in the cryptocurrency field, especially against the backdrop of SEC's leadership under Gary Gensler refusing to allow broker-dealers to handle cryptocurrency business.

Physical redemption is a common mechanism for traditional ETFs, such as stocks and bonds: authorized participants (usually institutional investors or market makers) can directly redeem large quantities of ETF shares from the issuer in exchange for the underlying assets held by the fund. This mechanism is relatively straightforward in traditional asset classes but much more complex in cryptocurrency products due to multiple challenges involving custody, security, and settlement.

"The most critical significance is symbolic - it means a new wind direction has arrived," said Eric Balchunas, senior ETF analyst at Bloomberg Intelligence. "Gensler-led SEC was not willing for this to happen. This is the first step by SEC towards supporting cryptocurrency in a more practical and cautious manner."

Since the launch of dozens of funds tracking Bitcoin and Ethereum, cryptocurrency ETFs have been limited to cash-only redemption, which has restricted their operational efficiency and tax advantages.

"SEC's approval of this long-standing request demonstrates its intention to take a practical and prudent approach to the US cryptocurrency field," said Hunter Horsley, CEO of Bitwise Asset Management, whose company offers physically backed Bitcoin and Ethereum funds. "This is good news."

In summary, this is a technical adjustment that marks another step towards digital assets integrating into the mainstream financial system. While it will not have an immediate impact on end-investors, it eliminates the stigma of cryptocurrency being considered a "second-class asset" for ETF professionals.

"Implementing physical redemption only makes ETFS' 'infrastructure' more complete," said Balchunas, but "will not have a practical impact on end-investors."

SEC also stated that it will approve other cryptocurrency-related products using the "neutral assessment" principle, including applications for holding mixed assets such as Bitcoin and Ethereum. The agency has also mentioned increasing the options of certain ETFs and raising the asset-holding limits.