In a significant development, BlackRock, one of the world’s largest asset managers, has made a pivotal adjustment to its Bitcoin exchange-traded fund (ETF) application.
The company has decided to embrace ‘cash creations’ for fund redemptions, aligning itself with the stance of US financial regulators.
This move marks a crucial step towards approving BlackRock’s Bitcoin ETF, as it is the last major ETF issuer to conform to the Securities and Exchange Commission’s (SEC) preference for cash-only redemptions.
BlackRock’s shift to cash-only redemptions
BlackRock’s decision to adopt a ‘cash-only’ redemption mechanism for its Bitcoin ETF has drawn significant attention in the financial industry.
Bloomberg senior ETF analyst Eric Balchunas highlighted this development, asserting, “BlackRock has gone cash only,” and further emphasized, That’s a wrap. Debate over. In-kind will have to wait. This shift reflects BlackRock’s willingness to align itself with the regulatory preferences of the SEC regarding ETF redemptions.
Under the ‘cash-only’ redemption system, BlackRock will accept cash from investors and then use it to purchase Bitcoin to create new shares. Conversely, when investors wish to redeem their ETF shares.
BlackRock will sell the Bitcoin and distribute cash to the redeeming shareholders. This approach eliminates the possibility of participants exchanging Bitcoin directly for ETF shares, a practice known as ‘in-kind’ redemption.
Prior proposal for hybrid in-kind redemption mechanism
Before settling on the ‘cash-only’ redemption method, BlackRock had initially proposed a hybrid in-kind ETF redemption mechanism. However, the SEC has consistently advocated for cash redemptions exclusively, temporarily rejecting any notion of an in-kind model.
This divergence in perspectives between ETF issuers and the SEC has been a focal point in the ongoing discussions surrounding the approval of Bitcoin ETFs.
Cash creation vs. In-kind redemption
To comprehend the significance of BlackRock’s decision, it’s essential to understand the distinction between ‘cash creation’ and ‘in-kind redemption,’ the two methods by which ETFs can issue and redeem shares.
In-Kind Redemption: Traditional ETFs often prefer ‘in-kind’ redemptions, allowing the issuer to exchange the fund’s underlying assets, such as Bitcoin, to create shares rather than using cash. This method offers advantages for the company, as it sidesteps market maker spreads and potential tax complications.
Cash Creation: Conversely, ‘cash redemptions’ require the fund issuer to accept cash to acquire the underlying asset (e.g., Bitcoin) and sell the asset to provide cash back to redeeming shareholders. The SEC favors This approach and benefits participants, but it results in taxable transactions.
SEC’s pressure on issuers
BlackRock is not the only ETF issuer to make this crucial shift towards ‘cash-only’ redemptions. Other prominent players in the industry have also adjusted their applications to comply with the SEC’s preferences.
Ark Invest and 21Shares recently made similar amendments to their filings, signaling their acceptance of ‘cash creation’ for ETF redemptions.
James Seyffart, an ETF analyst, noted that Wisdomtree’s recent filing amendment still allows for the possibility of ‘in-kind’ creation and redemption. However, the broader trend among ETF issuers appears to lean towards embracing ‘cash-only’ redemptions, indicating that the SEC’s stance on this matter is unwavering.
Balchunas emphasized the SEC’s unyielding position, stating, “I know for a fact ARK/21Shares did NOT want to do cash creations, even worked out a creative alt way to do in-kind… so if they’re surrendering that tells you SEC not budging, the debate is over.”
As the financial industry enters the holiday season, the shift towards ‘cash-only’ redemptions by major ETF issuers is viewed as a positive development in the quest for Bitcoin ETF approvals. Balchunas believes this shift positions the industry favorably for potential approval in January, despite the SEC’s insistence on ‘cash creation.’