Exchange-traded funds (ETFs) and trusts are central structures for crypto investment products, but their legal and operational differences can have a significant impact on investors. While the terms are sometimes used interchangeably, products marketed as crypto ETFs are often organized as trusts, contributing to confusion about their underlying structure, investor protections, and applicable regulations.
Defining ETFs and trusts in the crypto market
An ETF is a fund whose shares are traded on an exchange, allowing investors to gain exposure to a basket of assets or a single asset. A trust, on the other hand, is a legal entity that holds assets and can issue shares to investors. In the context of crypto, a single product can operate as a trust yet trade on exchanges like an ETF, so the distinctions are not always clear-cut.
The US Securities and Exchange Commission (SEC), the main regulatory authority for securities markets in the United States, has stated that most crypto exchange-traded products (ETPs) are structured as trusts that directly hold crypto assets or related derivatives. These products typically register their shares under the Securities Act of 1933 and the Securities Exchange Act of 1934, but, according to the SEC, they are generally not considered registered investment companies under the Investment Company Act of 1940.
The SEC’s explanation stresses that regulatory requirements, registration status, and investor protections may diverge from what is generally expected with traditional ETFs.
Mini dictionary: US Securities and Exchange Commission (SEC): The SEC is the federal agency responsible for protecting investors, maintaining fair and efficient markets, and facilitating capital formation in the United States. It oversees securities exchanges, brokers, and investment companies, including crypto-related products subject to federal securities laws.
Regulatory distinctions and product structures
The SEC’s investor bulletin describes traditional ETFs as either open-end investment companies or unit investment trusts, both of which are registered under the Investment Company Act of 1940. In contrast, many crypto ETPs marketed as ETFs do not hold this registration and may resemble commodity funds more than conventional ETFs, resulting in differences in applicable rules.
Product prospectuses, registration statements, and disclosures explain how these funds operate, what assets they hold, and what fees or risks apply. Regulators caution that the fund’s name alone does not guarantee similar holdings, structure, or investor protection.
| Feature | Traditional 1940 Act ETF | Crypto ETPs marketed as ETFs |
|---|---|---|
| Legal form | Open-end investment company or unit investment trust | Typically a trust holding spot crypto or derivatives |
| Investment Company Act status | Registered under the 1940 Act | Usually not registered under the 1940 Act |
| Assets and fees | Vary by fund; transparently disclosed | Vary by product; fees may reduce share value over time |
| Key disclosures | Prospectus, fees, risks | Prospectus, asset holdings, custody, fees, risks |
These differences underscore the importance of reviewing each product’s documentation rather than relying on its marketing label.
Shares, custody, and expense implications
Holding a share in a crypto trust is distinct from owning crypto directly. The SEC has indicated that most issuers rely on third-party service providers, such as crypto custodians, which introduces additional risks. Investors may face price fluctuations, operational risks, and the possibility of losing some or all of their investment.
Sponsor fees can erode the amount of crypto backing each share over time, as trusts often sell crypto to cover expenses. This means the value per share may decline even if crypto prices remain stable. Furthermore, the market price of shares can deviate from the value of the assets held in trust, creating a risk of divergence.
Crypto trust shares can lose value over time due to handling or sponsor fees, and the SEC advises investors to examine disclosures for details about pricing, asset holdings, and procedures for creation or redemption of shares.
A recent example is BlackRock’s iShares Bitcoin Trust ETF (IBIT), which reported $64,478,948,077 in net assets, a 0.25% sponsor fee, a single crypto holding, and no distribution as of November 4, 2026. BlackRock noted that IBIT is not registered under the Investment Company Act of 1940, emphasizing the distinction from conventional ETFs.
Mini dictionary: BlackRock: BlackRock is the world’s largest asset management firm, offering a range of investment products, including ETFs. Its iShares division manages popular ETFs, including crypto-linked funds such as the iShares Bitcoin Trust ETF (IBIT).
Recent regulatory developments for crypto ETPs
In 2025, the SEC approved rules that allow authorized participants to create and redeem some crypto ETP shares in kind, replacing the earlier cash-only method used for spot bitcoin and ether products. A 2026 amendment to NYSE Arca’s generic standards now permits actively managed commodity-based trust shares to hold up to 15% of net asset value in digital assets or securities that do not individually meet eligibility criteria.
The SEC also permitted the Bitwise 10 Crypto Index ETF to list under these revised standards, but clarified that such actions do not guarantee product performance or suitability for any particular investor. Regulatory focus has also turned to crypto custody for funds and advisers, with a proposal issued in October 2026 that would give registered investment advisers more flexibility, including self-custody in select cases and the use of state trust companies as custodians, pending certain conditions.
Listing standards, custody arrangements, and operational requirements for crypto ETPs continue to evolve, often differing from those for traditional ETFs and depending on the specific product and underlying regulations.
Market participants are encouraged to monitor regulatory updates and assess each product’s prospectus and disclosures before investing.
