Bitcoin ETF applicants will have to ‘bend the knee’ on cash redemption model

The SEC is pushing Bitcoin ETF issuers down the cash create route for creation and redemptions, but BlackRock has other ideas.

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As spot Bitcoin exchange-traded fund (ETF) issuers iron out details of their filings with the U.S. securities regulator, it appears that the SEC is steadfast in demanding a “cash” redemption model rather than alternative model proposed by other issuers, such as BlackRock.

On Dec. 14 finance lawyer Scott Johnsson said that ETF applicant Invesco has become the latest to bend the knee to using a cash creation and redemption model for its ETF.

I think everyone is gonna have to bend the knee to cash creates and redeems. https://t.co/1z9HknHyAG

— James Seyffart (@JSeyff) December 13, 2023

“The trust expects that creation and redemption transactions will take place initially in cash,” read their updated S-1 filing with the SEC.

The federal regulator has seemingly been pushing for a cash redemption model for spot Bitcoin ETFs, though some applicants, including BlackRock, have proposed using an “in-kind” model.

What’s the difference?

An ETF can create and redeem shares in two ways — cash creation/redemption and in-kind creation/redemption. A cash creation model is one where the authorized participant deposits cash in the ETF equivalent to the net asset value of the creation units to be created. The fund then uses this cash to purchase the underlying assets, in this case Bitcoin.

For in-kind creations, the participant deposits a basket of securities matching the composition and weighting of the ETF’s portfolio. This allows the fund to issue creation units to the investor without immediately selling the securities for cash.

This model is seen as more efficient for ETFs as it avoids bid and ask spreads and broker commissions from selling the basket just to raise cash for issuing shares; however, cash creation provides more flexibility for fund participants..

Explaining the difference to a Twitter user, Seyffart said the cash model leads to: “Slightly wider spreads. Potential tax inefficiencies. It will be better than anything currently available on tradfi rails.”

Bending the knee

Bloomberg senior ETF analyst Eric Balchunas said the latest filing was a “Pretty big clue that SEC is dug in on only letting cash create ETFs out in first run,” adding that they have also heard this through “back channels.”

He added that many were waiting to see if BlackRock could sway the regulator on in-kind creation, however, Seyffart remarked:

“I think everyone is gonna have to bend the knee to cash creates and redeems.”

In late November, BlackRock met with the SEC to discuss ETF share creation and redemption mechanisms. It presented a “revised” or hybrid in-kind model design favoring that method over cash creations.

Invesco is committing to cash creates only, as per their just-updated S-1. Pretty big clue that SEC is dug in on only letting cash create ETFs out in first run (which is what we hearing back channel as well). Still, many were waiting to see if BlackRock could sway SEC on in-kind https://t.co/l4DIu9G2Wh

— Eric Balchunas (@EricBalchunas) December 13, 2023

Seyffart also noted that Bitwise has been set for cash-only creates/redeems since Dec. 4, “though for months they had in-kind or cash in their documents before this.”

On Dec. 13, the SEC delayed its decision on whether to approve or disapprove a spot Ether ETF for Invesco and Galaxy Digital.

Moreover, representatives from several asset managers, including BlackRock, Grayscale, and Fidelity, have met with the SEC in recent weeks to iron out the final details for their spot BTC products before what analysts expect will be a batch approval in early January.

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