Spot Crypto ETFs Are Just the Beginning—What’s Next for TradFi’s Crypto Takeover?
2024’s Crypto ETF Boom Was Only the First Domino
The launch of spot Bitcoin and Ethereum ETFs in 2024 marked a major milestone in bridging traditional finance (TradFi) and digital assets. By November, crypto exchange-traded products (ETPs) had amassed over $134 billion in assets under management (AUM), cementing them as some of the fastest-growing ETFs in history.
But while the SEC-approved ETFs offered a gateway to crypto exposure, they came with a catch—cash-only redemptions. This regulatory restriction kept billions in digital assets sidelined, as crypto-native investors hesitated to shift holdings due to tax consequences and liquidity constraints.
That’s all about to change in 2025.
The In-Kind Redemption Revolution
TradFi giants like BlackRock are now lobbying for a key upgrade: in-kind redemptions. Unlike cash-based ETF transactions, this mechanism allows direct swaps between ETF shares and the underlying assets—Bitcoin and Ether—rather than forcing conversions to cash.
Why does this matter? In-kind redemptions supercharge liquidity and enable ETF holders to seamlessly transition between traditional and decentralized finance (DeFi). Crypto-native investors who were previously reluctant to move assets into ETFs due to tax friction will now have an easier path to integrate into mainstream finance without triggering immediate taxable events.
At the same time, institutional investors who got their first taste of crypto through ETFs can now take things a step further. Instead of simply holding exposure, they can redeem shares for actual crypto assets—allowing them to explore staking, lending, and broader DeFi participation.
Breaking Down Regulatory Barriers
Another critical catalyst in 2025 is the recent withdrawal of Staff Accounting Bulletin No. 21 (SAB-21), which had previously required financial institutions to account for crypto as liabilities on their balance sheets. This change removes a major obstacle for banks, brokerages, and custodians, paving the way for deeper integration of crypto-native financial products.
We’re already seeing the ripple effects. Coinbase, for instance, recently launched a Bitcoin-backed lending product in collaboration with Morpho Labs, using DeFi rails to provide uncollateralized loans. As TradFi players follow suit, expect a surge in products that blur the lines between traditional banking and crypto-native finance.
The New Era: Seamless Transition Between TradFi & DeFi
With ETFs evolving from passive exposure tools to crypto integration highways, the division between traditional markets and decentralized ecosystems is fading fast.
For long-time crypto holders, in-kind redemptions offer a tax-efficient way to leverage TradFi products without giving up direct ownership of their assets. For traditional investors, the ability to redeem ETF shares for real crypto unlocks a new world of financial tools—staking, DeFi lending, and self-custody.
Where Does This Leave Self-Custody?
Despite the growing institutional embrace of crypto, not everyone wants TradFi exposure. A parallel trend is unfolding: investors seeking greater control over their assets are gravitating toward self-custody solutions, ensuring they maintain sovereignty over their holdings while still tapping into the growing liquidity of TradFi markets.
Ultimately, 2025 will be the year that crypto stops being a niche asset class and fully integrates into the financial mainstream. The days of crypto ETFs being just “exposure tools” are numbered—these products are becoming the on-ramp to full-scale adoption.
Q&A: The Future of Crypto ETFs & Ownership
Q: What makes in-kind redemptions such a game-changer?
A: It eliminates the need to cash out, reducing tax friction and increasing liquidity between TradFi and DeFi markets. Investors can move in and out of ETFs without the same taxable implications as before.
Q: Will crypto-native investors embrace ETFs or stick to direct ownership?
A: It depends on the investor. Some will see ETFs as a bridge to TradFi perks like private banking and uncollateralized loans, while others will opt for self-custody to maintain full control over their assets.
Q: How do AI-driven financial systems fit into this shift?
A: AI agents optimizing portfolio management will likely lean toward on-chain assets due to 24/7 market access, automated smart contract execution, and composability—something ETFs still can’t fully match.
Q: Could banks eventually offer DeFi-like products?
A: We’re already seeing signs of this. With SAB-21 gone, banks have fewer restrictions on holding crypto, which means we’ll likely see yield-bearing accounts, tokenized assets, and even DeFi-powered loans emerge within the TradFi system.
Q: Will crypto ETFs replace self-custody?
A: No—if anything, they will complement it. Some investors will prefer the simplicity of ETFs, while others will demand self-sovereignty over their funds. The key is that the choice is expanding, rather than one method replacing the other.