SEC Lets Bitcoin, Ethereum and XRP ETFs Use In-Kind Creations: What That Changes

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Most crypto ETF trades occur between investors on secondary markets, meaning the fund does not purchase cryptocurrency for every individual share bought. Authorized participants create or redeem large share baskets, either by delivering cash that the trust converts into digital assets or, since the SEC approved in-kind mechanisms in July 2025, by supplying Bitcoin, Ethereum or XRP directly to the trust’s custodian. The underlying cryptocurrency is held by institutional custodians on behalf of the trust, with shareholders owning economic exposure rather than direct control of the assets. In-kind creations allow APs to deliver crypto directly, which can translate institutional demand into actual holdings within ETF custody accounts and help explain why sustained inflows can influence underlying asset prices.

Key Elements

Buying shares of a spot cryptocurrency ETF feels almost identical to purchasing any other stock. An investor logs into a brokerage account, places an order, and suddenly has exposure to Bitcoin, Ethereum or XRP without ever managing a private key. What happens behind that trade, however, involves a network of specialized institutions and, since mid-2025, a regulatory shift that has quietly reshaped how these funds acquire digital assets.

A common assumption is that when someone buys $1,000 worth of a Bitcoin ETF, the fund immediately goes out and purchases $1,000 of Bitcoin. That is rarely what occurs. Most ETF transactions happen between investors on a secondary market. The buyer’s cash goes to the seller of the shares, not to the asset manager. The underlying cryptocurrency only becomes relevant when sustained demand causes the supply of ETF shares to tighten or when the share price drifts away from the value of the assets held in the trust.

That is where authorized participants enter the picture.

Authorized participants, or APs, are large financial institutions that hold agreements with ETF sponsors allowing them to create and redeem shares in large blocks known as baskets. BlackRock, the world’s largest asset manager, limits this function for its Bitcoin and Ethereum ETFs exclusively to these designated counterparties. Their activity is what keeps an ETF’s market price anchored to the value of its underlying holdings.

There are two ways these baskets can be created. Under a cash creation, an AP delivers dollars to the trust. The trust then works through approved trading counterparties or liquidity providers to convert that cash into Bitcoin, Ethereum or XRP, which is subsequently placed with an institutional custodian. Under an in-kind creation, the process is more direct: the AP or its designated representative supplies the cryptocurrency itself and receives newly issued ETF shares in exchange.

A regulatory shift in July 2025

For years, the Securities and Exchange Commission required US spot crypto ETFs to operate exclusively with cash creations and redemptions. That changed in July 2025, when the regulator approved in-kind mechanisms for crypto exchange-traded products, bringing their structure closer to that of commodity ETFs backed by physical assets such as gold.

The distinction matters for how capital flows through these products. With cash-only structures, every new basket required a dollar transaction that then had to be converted into crypto through market intermediaries. In-kind creations allow an AP to deliver digital assets directly to the trust, removing a step from the process and potentially reducing friction for institutional participants.

Note: Creation method availability depends on each fund’s specific structure and regulatory filings.

How the mechanics work in practice

BlackRock’s funds, for instance, can transact with approved crypto counterparties or route through Coinbase Prime. Once the cryptocurrency is acquired, it is transferred to the trust’s custody account. Ethereum products follow a similar pattern, with APs able to use either cash or ether depending on the specific fund’s design.

XRP ETFs operate on broadly comparable principles, though the exact mechanism varies from fund to fund. Many XRP trusts currently rely on cash orders, where an AP delivers dollars and a liquidity provider acquires the required XRP on behalf of the trust. Other XRP funds permit creations using XRP, cash, or a combination of both.

One XRP trust’s SEC filing describes the in-kind process in notable detail. An authorized participant can send XRP through an on-chain transaction on the XRP Network directly to the trust’s custodian. Once the custodian confirms receipt, ETF shares are credited to the participant. This means rising institutional demand can translate into actual XRP being held within ETF custodial accounts.

As institutions create new ETF shares by delivering XRP directly to the trust’s custody account, fresh capital inflows can lead to greater amounts of the asset being held on behalf of ETF investors. The same dynamic applies to Bitcoin and Ethereum products that now permit in-kind creations.

This interplay helps explain why significant ETF inflows can fuel upward price momentum for the underlying cryptocurrencies. It also underscores why XRP ETF inflows have attracted particular market attention, especially during periods when Bitcoin products experience net outflows.

The underlying BTC, ETH or XRP is held by an institutional custodian on behalf of the respective trust. ETF shareholders own economic exposure to those assets through their shares, but they do not directly control the underlying cryptocurrency. That distinction separates spot ETFs from direct crypto ownership. Investors gain the convenience of a brokerage account and regulated market infrastructure, but they generally cannot withdraw the backed Bitcoin or XRP into personal wallets.

Selling ETF shares does not automatically force the fund to liquidate cryptocurrency, either. Another investor may simply purchase the shares on the secondary market. Actual redemptions occur only when authorized participants return large baskets of shares to the trust. Depending on the product’s structure, the fund can then either sell crypto and return cash or transfer the underlying digital asset in kind.

For investors, the practical takeaway is that ETF flows are not a simple reflection of retail buying pressure. A surge in inflows often represents institutional creation activity, where APs are delivering assets or cash to the trust in exchange for new shares. Understanding that distinction is key to interpreting what crypto ETF flow data actually signals about market demand.

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Source: finance.biggo.com