SEC Emphasizes Cash Redemption Models for Upcoming Spot Bitcoin ETFs
As the Securities and Exchange Commission (SEC) approaches its January 10 deadline to approve or deny the groundbreaking spot bitcoin exchange-traded funds (ETFs), companies are revising their filings to explicitly indicate the use of cash redemption models.
Recent updates in filings from prominent firms such as BlackRock Inc. and ARK Invest suggest that the SEC is now mandating cash redemption models for these funds. Notably, these ETFs would be the first to monitor physically backed bitcoin, diverging from the conventional approach of tracking bitcoin futures contracts. In their latest submissions, BlackRock, ARK, and other entities have transitioned from various in-kind redemption models to cash-based alternatives.
While the SEC has previously rejected proposals for spot bitcoin ETFs, a pivotal U.S. appeals court ruling in August challenged the agency’s decision to deny Grayscale Investments the opportunity to transform its Grayscale Bitcoin Trust (GBTC) into an ETF. This legal development compelled the SEC to reassess its stance on cryptocurrency, leading to collaborations with approximately twelve firms that have submitted applications for spot bitcoin funds.
Distinguishing Between In-kind and Cash Redemption Models for Spot Bitcoin ETFs
Though seemingly technical, the distinction between ETFs employing cash redemption models and those relying on in-kind redemptions could impact the overall cost of the fund.
Traditionally, most exchange-traded funds utilize the in-kind redemption model, allowing issuers to exchange the ETF’s underlying assets with a market maker rather than executing transactions in cash. The shift to a cash redemption model might result in higher transaction costs, potentially elevating the overall expense for investors, as pointed out by Bryan Armour, an ETF analyst at Morningstar.
The SEC Doesn’t want Broker-Dealers
Armour speculated, “The SEC doesn’t want broker-dealers to handle bitcoin directly, and they also want visibility into bitcoin transactions from the exchange to the fund. Requiring cash transactions allows the fund to manage the buying and selling of bitcoin directly.”
BlackRock and Grayscale had previously proposed an in-kind redemption model to the SEC, while Hashdex, a Brazilian crypto investment firm, initially suggested a cash redemption model.
Matt Hougan, Chief Investment Officer of Bitwise Asset Management, emphasized in an interview that the decision to enforce cash redemptions does not necessarily determine the success or failure of launching the first spot bitcoin ETFs. He expressed that, when considering the larger picture, the crucial inquiry revolves around the presence or absence of an ETF. These nuances determine if we are on the cusp of success.