- The US SEC had encouraged ETFs to do cash creates as opposed to in-kind creates to avoid use of unregistered brokers.
- BlackRock reportedly prefers in-kind creates for their Bitcoin ETF, with analysts saying it is the cleanest for end investors.
- This follows Grayscale also meeting with the unit with the same desire in their attached 8-K application.
- ETFs want Bitcoin redemptions if holders redeem the shares, but the SEC prefers cash redemptions.
BlackRock and Cathie Wood’s Ark Invest are in the queue, standing alongside several other institutional players that have their applications at the US Securities & Exchange Commission’s (SEC) desk, pending approval. An earlier report indicated that the financial regulator had another card up its sleeves and was already engaging with exchanges.
BlackRock, Ark Invest stand firm on in-kind creates
BlackRock reportedly met with theSEC, as did Ark Invest, as part of the ongoing diplomacy involved in getting spot Bitcoin exchange-traded funds (ETFs) approved. However, it appears the three players are now at an impasse, conflicting over in-kind versus cash creates.
Bloomberg ETF specialists Eric Balchunas and James Seyffart report that BlackRock and Ark remain steadfast on deploying ETFs that do in-kind creates, or crypto, as opposed to the cash creates alternative proposed by the SEC.
In-kind creates, according to Balchunas, are better for investors due to spreads and tax consequences. Seyffart adds that it is probably a better option since it provides the cleanest structure for the issuer as well as the end investors. Conversely, the financial regulator’s push for cash creates are favored to help prevent the use of unregistered brokers.
Looks like @BlackRock also met with SEC! There’s a couple slides in relation to in-kind vs cash creation. Based on this it looks like BlackRock prefers in-kind for their #bitcoin ETF (makes sense as its probably cleanest structure for them & end investors)
— James Seyffart (@JSeyff) November 22, 2023
h/t @btcNLNico https://t.co/AK0XspL4zJ pic.twitter.com/eeuUT9T5mn
Cash redemptions would also compel Blackrock and Ark to hold cash equivalents of Bitcoin that backs their ETFs.
Cash redemptions will force Blackrock and co to hold cash equivalent of Bitcoin that backs an ETF
— jooj (@DataJooj) November 22, 2023
E.g. Have 100 ETF shares equaling 1 bitcoin then the ETF provider has to have at all times the cash equivalent of 1 bitcoin.
Makes things an order of magnitude more difficult.
Since in-kind creates are arguably better on the taxation and spread front, it is possible that more issuers continue to push for an in-kind policy.
The in-kind redemption model is a sophisticated mechanism with the potential to revolutionize Bitcoin trading as we know it on traditional finance (TradFi) markets. BlackRock's approach, pending SEC approval, indicates a thoughtful bridging of the gap between digital assets and conventional financial instruments.
This news comes a day after Grayscale met with the SEC’s division of Trading and Markets, which is responsible for approving or denying 19b-4s.
Crypto ETF FAQs
What is an ETF?
An Exchange-Traded Fund (ETF) is an investment vehicle or an index that tracks the price of an underlying asset. ETFs can not only track a single asset, but a group of assets and sectors. For example, a Bitcoin ETF tracks Bitcoin’s price. ETF is a tool used by investors to gain exposure to a certain asset.
Is Bitcoin futures ETF approved?
Yes. The first Bitcoin futures ETF in the US was approved by the US Securities & Exchange Commission in October 2021. A total of seven Bitcoin futures ETFs have been approved, with more than 20 still waiting for the regulator’s permission. The SEC says that the cryptocurrency industry is new and subject to manipulation, which is why it has been delaying crypto-related futures ETFs for the last few years.
Is Bitcoin spot ETF approved?
Bitcoin spot ETF has been approved outside the US, but the SEC is yet to approve one in the country. After BlackRock filed for a Bitcoin spot ETF on June 15, the interest surrounding crypto ETFs has been renewed. Grayscale – whose application for a Bitcoin spot ETF was initially rejected by the SEC – got a victory in court, forcing the US regulator to review its proposal again. The SEC’s loss in this lawsuit has fueled hopes that a Bitcoin spot ETF might be approved by the end of the year.
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