SEC approves in-kind creations for spot Bitcoin, Ethereum, and XRP ETFs

The mechanics behind crypto ETFs

However, the process supporting these transactions is far more complex than it appears at first glance. Multiple entities—including authorized participants, market makers, liquidity providers, and institutional custodians—play critical roles in the background.

A common misconception is that buying $1,000 of a Bitcoin ETF prompts the fund to immediately purchase an equivalent amount of Bitcoin. Instead, most ETF trades occur between investors on an exchange, meaning the buyer’s funds primarily go to the seller, not the ETF manager.

The underlying cryptocurrency comes into play when rising demand for ETF shares causes the available supply to shrink or their market price to deviate from the value of the assets in the fund’s portfolio.

The role of authorized participants

Authorized participants (APs) are designated financial institutions with the exclusive ability to create or redeem significant blocks of ETF shares, known as baskets. For instance, BlackRock, a leading global asset manager, restricts this function for its Bitcoin and Ethereum ETFs to authorized participants.

ETF share baskets can be created in two primary ways: cash creation or in-kind creation. Cash creation involves APs supplying dollars, which the trust then converts into cryptocurrency—such as Bitcoin, Ethereum, or XRP—via approved trading partners or liquidity providers. The assets are then placed in institutional custody.

With in-kind creation, the AP or its representative can supply the cryptocurrency directly to the trust, receiving new ETF shares in exchange.

Mini dictionary: Authorized participants (APs) are specialized financial institutions that have agreements with ETF sponsors to create or redeem large blocks of ETF shares. Their activities help maintain the ETF’s market price closer to its underlying asset value.

Previously, the Securities and Exchange Commission (SEC) required US spot crypto ETFs to operate solely with cash creations and redemptions. In July 2025, the SEC approved in-kind mechanisms for crypto ETPs, aligning them more closely with commodity ETFs structured around physical assets such as gold.

For example, BlackRock’s funds can transact with approved crypto counterparties or use Coinbase Prime, transferring the resulting cryptocurrency to the trust’s custody account. In the case of Ethereum products, the process is similar, with APs able to use either cash or ether, subject to the fund’s structure.

XRP ETF procedures and impact

While XRP ETFs operate on broadly similar principles, specific mechanisms can vary among funds. Many XRP trusts currently use cash orders, where an authorized participant delivers dollars and a liquidity provider acquires XRP for the trust. Some XRP funds also allow for both cash and in-kind creations, depending on their design.

An SEC filing from one XRP trust details the in-kind process: an AP can send XRP via an onchain transaction to the trust’s custodian. Upon receipt, ETF shares are then credited to the participant. This means rising institutional demand may result in actual XRP being held within ETF custodial accounts.

As institutions create new ETF shares by delivering XRP directly to the trust’s custody account, new capital inflows can lead to greater amounts of the asset being held on behalf of ETF investors.

This interplay helps explain why significant ETF inflows can fuel upward price momentum for underlying cryptocurrencies. It also underscores why XRP ETF inflows attract market attention, particularly in periods when Bitcoin products experience net outflows.

Ownership and redemption distinctions

The cryptocurrencies backing these ETFs—whether BTC, ETH, or XRP—are stored with institutional custodians on behalf of the respective trust. ETF shareholders own exposure to these assets through their shares, but do not directly control the underlying cryptocurrency.

This arrangement distinguishes spot ETFs from direct crypto ownership, offering brokerage account convenience and regulated infrastructure but typically prohibiting direct withdrawal of the backed Bitcoin or XRP into personal wallets.

When ETF shares are sold, the fund itself generally does not need to liquidate cryptocurrency unless an authorized participant initiates a redemption of a large share basket. At that point, the fund either delivers cash or, if permitted, the underlying digital asset in kind.