Authorized participants make Bitcoin ETFs work, and critics say they can also game them

A small group of Wall Street banks — including JPMorgan, Goldman Sachs, and Jane Street, holds a privilege that no retail investor, no crypto-native firm, and no regulator can replicate: the exclusive right to create and destroy shares of the bitcoin ETFs now holding tens of billions in assets.

How that privilege is structured, and who it benefits, is becoming one of the more consequential debates in institutional crypto.

How authorized participants work in crypto ETFs

The mechanics differ slightly depending on how the ETF is structured. US spot bitcoin ETFs initially launched with a cash only model. Under this system, an authorized participant delivers cash to the issuer, who then instructs a custodian like Coinbase to buy bitcoin on their behalf. The AP never touches the crypto directly.

But in July 2025, the U.S. Securities and Exchange Commission approved in kind creation and redemption for crypto ETFs, a major shift. Now, authorized participants can deliver actual bitcoin or ethereum directly to the issuer in exchange for shares and vice versa. This change streamlines the process, lowers transaction costs, and improves tax efficiency for the fund itself.

In kind transactions can reduce taxable events at the fund level, 21Shares explained following the SEC’s approval.

However, the flexibility cuts both ways. Under the new framework, an authorized participant can choose how to acquire the underlying bitcoin through OTC desks, exchanges, or even by hedging with futures contracts rather than buying spot. This discretion has drawn scrutiny.

Why authorized participants are critical and controversial

The AP system keeps ETF prices honest through arbitrage. If an ETF trades below NAV, APs can buy shares, redeem them for the underlying assets, and sell those assets for a risk free profit. That buying pressure pushes the ETF price back up.

But in Bitcoin ETFs, something unusual happens. The list of authorized participants for iShares Bitcoin Trust includes firms like Jane Street, JPMorgan, Goldman Sachs, Citadel Securities, and UBS. These same institutions hold a concentrated role in the redemption pipeline. No one else can convert ETF shares directly into bitcoin.

The real issue lies deep within the underlying architecture of Bitcoin ETFs, wrote Eddie Xin, Chief Analyst at OSL Group. No single AP is explicitly suppressing Bitcoin’s price. What they can suppress is the integrity of the price discovery mechanism itself.

The concern stems from a regulatory exemption. Under Reg SHO, short sellers must typically borrow shares before selling them short. But authorized participants are exempt, allowing them to create shares without borrowing costs or strict deadlines to close positions. Some critics argue this creates incentives to exploit price gaps rather than close them.

Risks and challenges involving authorized participants

The biggest risk is concentration. While some ETF markets maintain multiple contracted APs, not all are active at once. In crypto, where fewer institutions have the operational infrastructure to handle digital assets, the AP universe is even tighter.

There is also the question of transparency. In multi token ETFs, authorized participants receive basket quotes from liquidity providers without seeing the per token spread breakdown. Without visibility into per token spread economics, it becomes difficult for issuers to evaluate execution quality.

Finally, the SEC’s in kind approval removed a structural guardrail. Under the cash only model, APs were forced to buy spot bitcoin, creating mechanical buy pressure. With in kind, they can source crypto anywhere or hedge with futures instead, potentially weakening the arbitrage link.

The takeaway

Authorized participants are the invisible market makers keeping ETFs efficient. But in crypto, their privileged position and regulatory exemptions have opened a debate about whether the system is working for everyone or primarily for large financial institutions.