As the January 10 deadline set by the Securities and Exchange Commission (SEC) approaches to greenlight or reject a unique spot bitcoin ETF, companies are revising their filings to outline that their ETF redemption plans will utilize cash creations.
Recent updates in filings from firms like BlackRock Inc. and ARK Invest indicate that the SEC is mandating cash redemption models for these funds. These would mark the initial attempts to trace physically backed bitcoin rather than bitcoin futures contracts. In their latest filings, BlackRock, ARK, and other entities have shifted from various forms of in-kind redemptions to cash redemptions.
While the SEC has previously rejected proposals for a spot bitcoin ETF, an August ruling by a U.S. appeals court found the agency at fault for blocking Grayscale Investments’ bid to convert its Grayscale Bitcoin Trust (GBTC) into an ETF. This forced the commission to alter its approach toward cryptocurrency. Since then, the SEC has been collaborating with roughly a dozen firms that have submitted applications for a spot bitcoin fund.
In-Kind versus Cash Redemption for Spot Bitcoin ETFs The distinction between an ETF employing a cash redemption model versus an in-kind one, although technical, could potentially impact the fund’s overall cost.
The prevalent in-kind redemption model in most exchange-traded funds enables issuers to exchange the ETF’s underlying assets with a market maker, bypassing cash transactions. According to Bryan Armour, an ETF analyst at Morningstar, a cash redemption model might escalate transaction costs, potentially elevating the product’s expenses for investors.
Armour speculated, “The SEC possibly aims to keep broker-dealers from dealing with bitcoin, while also seeking visibility into bitcoin from the exchange to the fund. So, if broker-dealers can’t handle it, the only way is to mandate cash and have the fund manage the cash transactions for buying and selling bitcoin.”
Previously, both BlackRock and Grayscale had proposed versions of an in-kind redemption model to the SEC. Hashdex, a Brazilian crypto investment firm, initially suggested a cash redemption model.
Matt Hougan, chief investment officer of Bitwise Asset Management, suggested in an interview with etf.com that enforcing cash redemptions isn’t a definitive factor in rolling out the first spot bitcoin ETFs. “The critical question from a broader perspective is whether we’ll have an ETF or not. These intricacies signal if we’re nearly at the finish line,” he remarked.
