BlackRock’s IBIT Bitcoin ETF Switches to In-Kind Process

The SEC’s approval order represents a quiet but profound shift in how BlackRock’s IBIT Bitcoin ETF operates. Previously, when spot Bitcoin ETFs launched in January 2024, the SEC mandated cash-only creations and redemptions. Authorized participants like Citadel or UBS had to wire cash to Coinbase to source Bitcoin when creating new ETF shares, and the reverse process required liquidating Bitcoin to fund redemptions. This cash-based model created multiple layers of friction, including transaction costs, custody fees, and most importantly, tax complications that widened bid-ask spreads and introduced tracking errors between IBIT’s share price and Bitcoin’s actual value.

With the new in-kind process, authorized participants can now bypass the cash conversion entirely. When creating 1,000 BTC worth of IBIT shares, market makers can simply transfer 1,000 BTC directly from their own balance sheets. Similarly, redemptions involve returning IBIT shares and receiving Bitcoin directly without forced liquidation. This streamlined approach eliminates the ‘fiat leg’ that previously complicated every creation and redemption cycle, allowing for more efficient capital movement and tighter inventory management among the largest market participants.

Not every firm can take advantage of this new in-kind privilege. The SEC’s approval order and updated IBIT prospectus specifically name four authorized participants with this capability: Jane Street, Virtu Americas, JP Morgan Securities, and Marex. These firms represent the dominant market-making desks in the ETF ecosystem, and their exclusive access to direct Bitcoin transfers gives them significant operational advantages over competitors who must still navigate the cash-based system.

This selective authorization creates a tiered market structure where these four firms can execute faster arbitrage, manage basis risk more effectively, and maintain tighter inventory controls. Their ability to move Bitcoin in and out of IBIT’s custodian wallet without dollar conversion means they can respond more quickly to market movements and pricing discrepancies, potentially capturing arbitrage opportunities that other market participants might miss due to the additional steps and costs of cash settlement.

The operational upgrade positions IBIT to further extend its dominance in the Bitcoin ETF space. According to CryptoSlate’s coverage of Farside data, IBIT already consistently attracts hundreds of millions, if not billions, in net inflows even when competitors experience outflows. By lowering friction for authorized participants, BlackRock has effectively sharpened its competitive edge. Cheaper creations mean market makers can quote tighter spreads, attracting more secondary-market volume, while cleaner redemptions reduce exit costs for institutions concerned about liquidity when trading large positions.

The tax implications represent another significant advantage. Cash redemptions previously triggered taxable events when authorized participants had to sell Bitcoin to fund withdrawals. In-kind transfers, by contrast, are generally tax-neutral, providing institutions with meaningful tax efficiency. Some ETF lawyers suggest this approach might also sidestep wash-sale complications since redemptions now involve moving the asset itself rather than cycling through cash transactions. This tax advantage could prove particularly valuable for institutional investors managing complex balance sheets and tax considerations.

For retail investors, the change remains largely invisible—IBIT continues trading under the same ticker with the same fees. However, the underlying improvements should benefit all market participants through tighter spreads that shave basis points off every trade and improved tracking accuracy against Bitcoin’s price. The enhanced efficiency could make IBIT the default liquidity pool for Bitcoin exposure, forcing competitors to seek similar in-kind approval to remain competitive in the evolving ETF landscape.

The transition to in-kind processing represents a maturation of Bitcoin ETF infrastructure, bringing IBIT closer to the operational model of established commodity ETFs like those tracking gold. The ability to directly exchange the underlying asset for shares creates a more direct relationship between the ETF and its benchmark, potentially improving market structure across the cryptocurrency ecosystem. Moving coins in and out of custodian wallets without fiat detours could boost Bitcoin turnover at scale, with potential knock-on effects for derivatives markets that hedge against ETF inventory.

As BlackRock achieves the in-kind Bitcoin fund it wanted from the beginning, the pressure mounts on competitors to secure similar approvals. The operational efficiencies and cost advantages created by this change could accelerate flows into IBIT relative to other Bitcoin ETFs, at least until they obtain comparable privileges. This development marks another step in the institutionalization of Bitcoin markets, demonstrating how traditional financial infrastructure continues to adapt and optimize around cryptocurrency assets while maintaining regulatory compliance and operational efficiency.