Bitcoin Exchange-Traded Funds (ETFs) have been a hot topic, with the United States Securities and Exchange Commission (SEC) showing a strong preference for a cash-based redemption model. This approach to a Bitcoin ETF, despite some resistance from applicants like BlackRock, seems to be gaining traction.
Bitcoin ETF: Cash vs. In-Kind Redemption Models
The SEC has been urging ETF issuers to adopt a cash redemption model, requiring authorized participants to deposit cash equivalent to the ETF’s net asset value. This cash is then used to purchase underlying assets like bitcoin. On the other hand, the in-kind redemption model involves transferring a matching portfolio of securities to create new ETF shares, avoiding immediate selling for cash.
Invesco and Galaxy Yield to SEC’s Demands
Recent filings from Invesco and Galaxy revealed their compliance with the SEC’s preference for cash-based redemptions, as noted by Scott Johnsson. This move signifies a shift in strategy for these issuers, aligning with the regulator’s directives.
The updated S-1 filing with the SEC reads:
“The trust expects that creation and redemption transactions will take place initially in cash.”
Financial lawyer Scott Johnson believes that Invesco’s revised S-1 form clearly indicates their compliance with the SEC’s directives, portraying them as the most recent entity to yield to the regulator’s demands.
BlackRock’s Resistance and Modifications
BlackRock, among other firms, had initially proposed an in-kind redemption model. However, it appears that the SEC’s push for cash creates and redeems might influence the first wave of approved Bitcoin ETFs. Despite meeting with the SEC and presenting a revised hybrid model, BlackRock’s efforts to sway the SEC’s stance on in-kind creation remain uncertain.
Related reading: BlackRock BTC ETF Plan Encourages Banks to Invest in Bitcoin
Analysts’ Perspectives
Notably, Bloomberg Intelligence senior ETF analysts Eric Balchunas and James Seyffart have highlighted the significance of these developments. Balchunas suggests that the SEC might approve only those ETFs adopting the cash creation model, a sentiment echoed by Seyffart, who foresees widespread compliance with cash-based redemptions.
“I think everyone is gonna have to bend the knee to cash creates and redeems” stated James Seyffart, while adding:
“@BitwiseInvest has already been set for ONLY cash creates/redeems since December 4th. Though for months they had In-Kind or Cash in their documents […] Slightly wider spreads. Potential tax inefficiencies. It will be better than anything currently available on tradfi rails.”
Recent Shifts and SEC’s Decisions
Bitwise’s recent switch to using only cash for ETF share creation and redemption further indicates a trend toward cash-based models.
Meetings between asset managers like BlackRock, Grayscale, and Fidelity and the SEC indicate preparations for a potential batch approval of Bitcoin ETFs in early January, as reported earlier by BitcoinNews. This could suggest the regulator’s readiness to approve ETFs adhering to the cash redemption model.
The clash between the SEC’s preference for cash-based redemption models and applicants advocating for in-kind models continues to shape the ETF landscape. With prominent issuers yielding to the SEC’s directives and ongoing discussions between regulators and industry leaders, the approval of Bitcoin ETFs using the cash redemption model seems imminent, potentially paving the way for a new wave of investment opportunities in the Bitcoin space.
