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Author: Liam Wright, Source: CryptoSlate, Compiled by: Shaw Bitchain Vision
On July 29, the U.S. Securities and Exchange Commission (SEC) approved a mechanism for the creation and redemption of Bitcoin and Ethereum Spot Exchange Trading Products (ETPs) in physical form, marking a significant shift in the structural framework supporting cryptocurrency investment vehicles.
The decision replaced the cash-only model adopted by the first cryptocurrency ETPs and aligns the regulatory structure of digital asset funds with the standards of existing commodity ETPs such as gold ETPs.SEC Chairman Paul S. Atkins took office in April, describing the move as part of a broader effort to build a “applicable” cryptocurrency framework.
The SEC’s order also advances a series of related approvals, including an exchange-traded product (ETP) application for mixed Bitcoin (BTC) and Ethereum (ETH), options for certain spot Bitcoin ETPs, and raising the position limits of these derivatives to a common ceiling of 250,000 contracts commonly found in traditional commodity markets.
These changes are intended to harmonize the cryptocurrency derivatives ecosystem with the historic physical asset ETP ecosystem.Previously, several exchanges have submitted a series of applications in July, indicating that regulators are ready to adopt a workflow for physical asset ETP.
Unlike the cash structure, in which participants (APs) are authorized to submit fiat currencies and rely on fund agents to perform cryptocurrency purchases on the open market, the physical mechanism allows the AP to deliver or receive the underlying assets directly, i.e. Bitcoin or Ethereum.
This eliminates fund-driven market trading needs, allowing participants to leverage existing procurement channels such as over-the-counter (OTC) counters, internal inventory or lending arrangements.The result is usually a lower transaction cost, a narrower bid-ask spread, and a more accurate tracking of net worth (NAV), which has been well proven in commodity exchange-traded funds (ETFs) like SPDR Gold Shares.
How to change the model in physical subscription and redemption
This operational transformation will reconfigure the flow of capital in the primary market for APs focusing on arbitrage.In physical mode, when a premium occurs, they can short the ETF and directly obtain cryptocurrency for subscription; when a discount occurs, they can redeem ETF shares in exchange for cryptocurrency.This eliminates execution delays and basis risks associated with cash settlement, creating clearer hedging opportunities with CME futures.Given that open interest in CME Bitcoin derivatives approaches all-time highs in mid-2025, liquidity seems to be enough to support these changes.
The revised mechanism also changes the way ETFs’ capital flows interact with the spot cryptocurrency market.In the previous model, fund purchases or redemptions will directly create buying/selling pressure on the exchange, often affecting short-term price trends.
Now, APs can fulfill their asset obligations through the over-the-counter trading (OTC) channel, reducing market footprint and potentially reducing volatility on days of high volume.This is similar to the practice of the gold market using the OTC network to settle gold ETP transaction flows, thereby reducing the pressure on the public order book.
Open the door to large-scale capital inflows
As infrastructure matures, some indicators will reflect the impact of this decision on the market.These indicators include premium and discount behavior of ETFs relative to net asset value, the spread between CME’s futures and spot prices, and the in-market depth indicators of major U.S. dollar trading venues.Analysts will focus on whether OTC activity will increase on high subscription days and whether liquidity on public exchanges will become more resilient.
Mechanistically speaking, this shift may slightly reduce the direct impact of ETF capital flows on trading, thereby suppressing the short-term price effect of primary market activity.However, the broader impact is that this shift will scale up.
Lower costs, clearer arbitrage methods and more complete hedging tools all increase the attractiveness of ETFs to institutional allocators.If these advantages can be translated into sustained net capital inflows, upward pressure on spot demand for Bitcoin and Ethereum could be quite high.
ETF capital flow data at the beginning of 2025 have shown that there is a close relationship between net inflows and the rise in Bitcoin price.By simplifying fund operations, the physical delivery model lowers the threshold for large-scale allocation and makes price trends more predictable.
The increase in options and higher derivatives limits further support the institutional layout, which echoes past access innovations that have helped expand commodity exposure.
This regulatory reform has effectively modernized the infrastructure related to cryptocurrency ETP.
By allowing physical subscription and redemption, the SEC created a pathway that enables demand to flow into digital assets more efficiently, thus reducing friction without changing the rationale: capital flows affect the market, and structure determines how much money can enter the blockchain.
Ultimately, if Bitcoin ETFs want to compete with the world’s largest funds in terms of asset size, a physical subscription and redemption mechanism is essential.This operational model brings great opportunities, and the efficiency gains it brings are crucial to attracting additional funds.
According to asset management scale, the largest ETF is the S&P 500 ETF (VOO), a subsidiary of Pioneer Group, with an asset scale of US$714 billion.By contrast, the largest spot cryptocurrency ETF is BlackRock’s IBIT, which currently manages $86 billion.
ETF rankings (Source: VettaFi)
Can physical subscription and redemption allow Bitcoin ETF to grow to a level comparable to VOO with a scale of US$700 billion?This requires Bitcoin ETF to grow 10 times from its current scale, but if the price of Bitcoin continues to rise against the US dollar, who can tell what will happen in the future?
When Bitcoin price reached $200,000, IBIT was already among the top ten ETFs in asset size even if there was no new capital inflow.If capital inflows continue in the next few years and Bitcoin prices continue to rise, supply tightness is almost inevitable.
