BlackRock has taken a significant step to enhance its iShares Ethereum Trust ETF (ETHA) by filing an amendment with the Securities and Exchange Commission that would introduce in-kind creation and redemption capabilities, a move that could dramatically improve operational efficiency and attract broader institutional adoption.
The May 9, 2025 filing, submitted through Nasdaq, proposes allowing authorized participants to exchange ETF shares directly for Ethereum (ETH) rather than being limited to cash transactions only. This operational enhancement positions BlackRock’s Ethereum ETF to compete more effectively in the rapidly growing crypto ETF market.
Game-Changing Operational Enhancement
The proposed in-kind redemption feature represents a fundamental shift in how the iShares Ethereum Trust would handle share creation and redemption. Currently, the ETF only supports cash-based transactions, where the Trust must buy or sell Ethereum on the open market to accommodate creation and redemption orders.
Under the new proposed structure, authorized participants would have the option to receive actual Ethereum when redeeming shares or deliver Ethereum when creating shares. This change eliminates the need for the Trust to conduct potentially market-impacting Ethereum transactions, instead transferring that responsibility to the authorized participants who can source or sell the underlying ETH more efficiently.
“The proposed changes would permit the Trust to utilize an in-kind creation and redemption process in addition to the cash creation and redemption process,” states the Nasdaq filing. “This added ability would make the Trust (and the market more generally) operate more efficiently.”
Institutional Appeal and Cost Benefits
The introduction of in-kind redemption is particularly significant for institutional investors, who have long favored this structure in traditional ETFs for its tax efficiency and operational advantages. By allowing authorized participants to receive or deliver actual Ethereum rather than cash, the ETF reduces transaction costs and minimizes the market impact of large creation or redemption orders.
This operational improvement comes at a crucial time for ETHA, which has already attracted substantial institutional interest with $3.52 billion in inflows and $2.3 billion in assets under management since its launch. The in-kind redemption feature could help the ETF maintain its competitive edge as dozens of new crypto ETFs await regulatory approval.
Institutional investors typically prefer in-kind redemption because it allows them to maintain their Ethereum positions without triggering taxable events that occur when the ETF sells crypto assets for cash distributions. This tax efficiency could make ETHA more attractive to tax-sensitive institutional portfolios.
Enhanced Custody Structure
Beyond the in-kind redemption feature, BlackRock’s filing also proposes adding Anchorage Digital Bank N.A. as an additional Ethereum custodian. Anchorage Digital Bank, a national trust bank chartered by the Office of the Comptroller of the Currency, would serve as an alternative to the current custodian, Coinbase Custody Trust Company.
The dual-custodian approach enhances security by diversifying third-party service provider risk. According to the filing, “the proposed rule change to add the Additional Ether Custodian is consistent with the Act because it could mitigate and diversify potential third-party service provider risk in the event that the Ether Custodian was unable to provide custody services.”
Both custodians would be required to maintain the Trust’s Ethereum in segregated custody accounts with cold storage security protocols, ensuring robust asset protection while providing operational redundancy.
Regulatory Process and Timeline
The SEC filing, designated as File No. SR-NASDAQ-2025-038, entered the regulatory review process on May 9, 2025. Under standard SEC procedures, the Commission has 45 days from the publication date in the Federal Register to approve or disapprove the proposed changes, though this timeline could be extended up to 90 days if the SEC determines additional review is necessary.
Industry analysts anticipate a decision by November 10, 2025, based on typical SEC review timelines for similar crypto ETF amendments. The relatively straightforward nature of the proposed changes—focused on operational efficiency rather than novel exposure mechanisms—could facilitate a smoother approval process compared to more controversial crypto ETF applications.
The regulatory filing represents Nasdaq’s amendment to Rule 5711(d), which governs commodity-based trust shares listed on the exchange. This regulatory framework provides the foundation for the operational changes while maintaining investor protection standards.
Market Impact and Competitive Position
BlackRock’s move to introduce in-kind redemption comes amid fierce competition in the crypto ETF space, with over 70 new funds awaiting regulatory approval. The operational enhancement could help ETHA maintain its leadership position among Ethereum ETFs by offering features that institutional investors expect from traditional ETF products.
The timing of this filing is particularly strategic, occurring as Ethereum continues to gain institutional acceptance and the broader crypto market experiences renewed interest following regulatory developments in other areas. The ability to offer in-kind redemption could become a key differentiator as institutional allocators evaluate various crypto ETF options.
Market observers note that in-kind redemption capabilities could help reduce the ETF’s tracking error by minimizing the timing differences between ETF share transactions and underlying Ethereum purchases or sales. This operational efficiency could result in tighter correlation between ETF performance and Ethereum’s spot price movement.
Looking Ahead
As the SEC reviews BlackRock’s proposal, the crypto industry watches closely for signals of regulatory openness to operational improvements in existing crypto ETFs. The approval of in-kind redemption for Ethereum ETFs could pave the way for similar enhancements across other crypto asset classes, potentially accelerating institutional adoption.
For investors considering exposure to Ethereum through regulated investment vehicles, the proposed changes represent another step toward maturity for crypto ETFs, bringing them closer to operational parity with traditional ETF structures that institutional investors have utilized for decades.
The outcome of this regulatory review could have significant implications for the broader crypto ETF landscape, potentially setting precedents for how crypto ETFs structure their creation and redemption processes to better serve institutional investors’ needs.
This article reflects information available as of May 13, 2025. Regulatory developments and market conditions may have evolved since publication.
