The US Securities and Exchange Commission (SEC) remains steadfast in its insistence on a “cash” redemption model for Bitcoin exchange-traded funds (ETFs), despite alternative proposals from issuers like BlackRock.
Recently, Invesco and Galaxy, in response to SEC’s stance, have updated their S-1 filing, signaling a shift toward a cash creation and redemption model for their ETFs.
According to finance lawyer Scott Johnsson, the amended filing specifies that creation and redemption transactions are expected to initially take place in cash.
SEC Prefers Cash Redemption Model for Bitcoin ETFs Over In-Kind Approach
In contrast to the suggested “in-kind” model by some applicants like BlackRock, the cash creation model involves authorized participants depositing cash equivalent to the net asset value of the creation units. The fund then utilizes this cash to acquire the underlying asset, such as Bitcoin.
In the in-kind creation model, participants deposit a basket of securities mirroring the ETF’s portfolio. This allows the fund to issue creation units without an immediate sale of securities for cash. While the cash model may lead to slightly wider spreads and potential tax inefficiencies, it offers greater flexibility for fund participants.
Bloomberg senior ETF analyst Eric Balchunas interprets the latest filing as an indication of the SEC’s insistence on allowing only cash-created ETFs initially. Although there was anticipation regarding whether BlackRock could persuade the regulator to consider in-kind creation, analyst Seyffart suggests that most issuers may eventually adopt the cash creation and redemption model.
SEC Favors Cash-Only Approach Despite Revised Models by BlackRock and Bitwise
Despite BlackRock presenting a revised hybrid in-kind model in late November, favoring this method over cash creations, the SEC seems to favor the cash-only approach. Moreover, Bitwise has also shifted towards cash-only creation and redemption since December 4, abandoning its initial inclusion of both in-kind and cash options.
The SEC, in its recent decision, postponed the approval of a spot Ether ETF for Invesco and Galaxy Digital. Representatives from major asset managers like BlackRock, Grayscale, and Fidelity have been in discussions with the SEC to finalize details for their spot BTC products. Analysts anticipate batch approvals in early January as the industry adapts to the SEC’s stance on cash redemption for Bitcoin ETFs.
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