The United States Securities and Exchange Commission (SEC) is maintaining its stance on requiring Bitcoin exchange-traded fund (ETF) issuers to use a “cash” redemption model for their creations and redemptions.
This decision comes despite alternative proposals, including one from BlackRock, that suggest an “in-kind” model. As the cryptocurrency community eagerly awaits the approval of Bitcoin ETFs, it appears that the SEC is unwavering in its preference for the cash redemption model.
Invesco bends to SEC’s demand
Invesco, one of the applicants seeking SEC approval for a Bitcoin ETF, has recently acquiesced to the SEC’s preference for the cash creation and redemption model. In a revised S-1 filing with the SEC, Invesco stated, “The trust expects that creation and redemption transactions will take place initially in cash.” This decision marks the latest in a series of applicants conforming to the SEC’s requirements.
Cash vs. In-Kind redemption models
The distinction between the two redemption models lies in how ETFs create and redeem shares. In a cash creation model, authorized participants deposit cash equivalent to the net asset value of the creation units.
The ETF then uses this cash to purchase the underlying assets, such as Bitcoin. On the other hand, the in-kind creation model involves the deposit of a basket of securities matching the ETF’s portfolio composition and weighting.
This allows the fund to issue creation units without immediately selling the securities for cash.
While the cash creation model provides more flexibility for fund participants, the in-kind model is considered more efficient for ETFs as it eliminates bid and ask spreads and broker commissions associated with selling the securities for cash.
However, the in-kind model may lead to slightly wider spreads and potential tax inefficiencies, although it is expected to be an improvement over traditional financial rails.
SEC remains firm on cash creation
The SEC’s insistence on the cash creation model for spot Bitcoin ETFs has become increasingly evident. Industry experts and insiders have reported that the SEC is resolute in its position.
Bloomberg senior ETF analyst Eric Balchunas noted that the recent Invesco filing indicates the SEC’s commitment to allowing only cash-created ETFs initially.
Balchunas also mentioned that this information had been relayed through unofficial channels.
While many had been waiting to see if BlackRock could sway the SEC with its in-kind creation proposal, it appears that the regulator is pushing for uniformity in favor of cash creation.
BlackRock’s efforts to influence SEC
BlackRock, a prominent asset management firm, has been actively engaged with the SEC in discussions about ETF share creation and redemption mechanisms.
The company has presented a “revised” or hybrid in-kind model design to the SEC, emphasizing the advantages of this approach over cash creation. However, it remains to be seen if the SEC will be swayed by BlackRock’s arguments.
In addition to Invesco’s recent delay in its spot Ether ETF decision, other asset managers like Grayscale and Fidelity have been in discussions with the SEC to finalize the details of their spot Bitcoin products.
Analysts anticipate a batch approval of these products in early January, signaling a potential turning point for cryptocurrency adoption in traditional financial markets.
As the cryptocurrency market continues to evolve and gain mainstream acceptance, the SEC’s decision regarding the redemption model for Bitcoin ETFs holds significant importance.
The debate between cash creation and in-kind creation models remains a focal point, with market participants closely monitoring the SEC’s stance as they prepare for the next chapter in the evolution of cryptocurrency investment products.