# SEC Indicates Positive Shift Toward In-Kind Transactions for Digital Asset ETFs

In a noteworthy development, the U.S. Securities and Exchange Commission (SEC) appears to be signaling a promising regulatory shift regarding the in-kind creation and redemption mechanisms for digital asset Exchange-Traded Funds (ETFs). This regulatory evolution comes as five major ETF issuers petition the SEC for approval to incorporate this feature, potentially marking a turning point in the integration of digital assets with traditional investment vehicles.

A report by CoinGape on the 23rd highlights comments from Bloomberg analyst James Seyffart, who noted that Ark 21Shares, VanEck, Invesco, WisdomTree, and Fidelity have submitted amended ETF applications to the SEC via the Chicago Board Options Exchange (CBOE). These revisions aim to include the ability for ETFs to enable in-kind exchanges—where the transfer of underlying digital assets occurs directly—instead of relying exclusively on cash transactions.

“This could signal a positive shift in the SEC’s regulatory perspective,” Seyffart remarked, suggesting that the commission seems open to adapting its policies to align with the evolving landscape of digital finance.

# The Significance of In-Kind Functionality for ETFs

In-kind creation and redemption functionality allows ETF shares to be exchanged directly for digital assets without requiring conversion to cash. This approach could offer advantages to investors, such as bypassing the need to sell digital assets for liquidity, thereby potentially avoiding capital gains taxes. Seyffart noted that this mechanism could also enhance the operational efficiency of ETFs by simplifying transactions and reducing intermediary steps.

However, the benefits of this functionality would mainly accrue to "Authorized Participants" (APs)—key players such as institutional investors, market makers, and major Wall Street firms responsible for facilitating ETF liquidity. “For retail investors, the difference will likely be negligible,” Seyffart explained. “Existing ETF products already provide exceptional liquidity and efficiency from their perspective.” Nevertheless, the introduction of in-kind functionality represents a technological leap that could reshape operational frameworks for institutional participants.

# Evolution of the SEC’s Stance on Digital Assets

The SEC’s apparent shift comes after years of hesitance toward in-kind functionality for digital asset ETFs. Earlier in April, the commission declined a similar proposal from VanEck. However, the landscape seems to be changing, potentially spurred by BlackRock’s recent filing for its own digital asset ETF. Additionally, the SEC’s Digital Assets Task Force is becoming more active, engaging with industry stakeholders through roundtables and other forums to better understand the nuances of this emerging asset class.

Such regulatory engagement coincides with heightened momentum in the digital asset market. For instance, the Ethereum ETF recently achieved a daily inflow of $717 million, reflecting robust market demand. Furthermore, there’s an increasing push to add staking features to digital asset ETFs. BlackRock has already filed for staking functionality in its proposed Ethereum ETF, joining the ranks of products like the Rex-Ospray Solana ETF that have already integrated staking mechanisms.

# A Crucial Turning Point for Digital Asset ETFs

The actions of Ark 21Shares, VanEck, Invesco, WisdomTree, and Fidelity in amending their ETF applications represent more than just procedural updates—they may signify a pivotal moment for the regulatory trajectory of digital asset ETFs. These developments have sparked anticipation across the investment community, as market participants assess how the SEC’s evolving policies will shape this burgeoning sector.

As the SEC steps closer to addressing in-kind functionality, it is clear that both regulators and industry players are preparing for the next chapter in the digital asset evolution. Whether these changes pave the way for widespread adoption or remain limited to institutional advantages, the amended applications and heightened SEC activity serve as a critical bellwether for the future of investment products in a digital-first economy.