- The US SEC has been pushing for cash redemptions over crypto redemptions, prompting filers to amend applications to beat the queue.
- A series of misconceptions has the financial regulator worried, with money laundering passing among the key concerns, Charles Gasparino say.
- SEC wants cash creates as only issuers (not intermediaries) would handle BTC, keeping unregistered broker dealers away.
Amid ongoing spot Bitcoin exchange-traded funds (ETFs) race, the US Securities and Exchange Commission (SEC) has been engaging with the institutional players in the race for approvals. By and large, the plain message has reportedly been that the ETFs do cash creates or wait, according to ETF specialist with Bloomberg Intelligence, Eric Balchunas in a recent post.
Also Read: SEC demands ‘cash creates or you will wait’
SEC possibly pushing for cash creates over money laundering concerns
The US “SEC [is] worried about ETFs being used as a vehicle for money laundering,” according to Charles Gasparino, senior correspondent with Fox Business News. His comments come amid a pronounced push from the financial regulator, that filers’ ETF products only doe cash redemptions and not crypto redemptions.
Evidence of this is the recent series of amendments where multiple firms, including Invesco, BlackRock, Ark Invest 21Shares, Valkyrie, and Fidelity have indicated having embraced cash creates.
Interesting detail: SEC worried about money laundering via in-kind creations in a spot bitcoin ETF, this is why they so dug in on cash creates only (which is a much more closed system). Rest of the info here we already knew.. https://t.co/3qpXEaN6vM
— Eric Balchunas (@EricBalchunas) December 20, 2023
Cash creates, which is a “much more closed system,” according to Balchunas, would require that the customer gives the issuer cash for new ETF shares, and then the issuer buys Bitcoin. Conversely, for in-kind creates, the customer gives the issuer BTC in exchange for the ETF shares.
Increasing demand for a BTC ETF would therefore prompt an intermediary ("the AP") to create new ETF shares. Ultimately, this would mean that either way new ETF shares translate to new Bitcoin purchase.
In a recent post, Balchunas indicated that the SEC is pushing for cash redemptions because it would mean only the ETF issuer handles Bitcoin and not the intermediaries, who could be registered and/or unregistered broker dealers.
The reason the SEC wants cash creates only is this means only the ETF issuer handles btc and not the intermediaries (registered broker dealers can't). They prob also not comfy w them having unregistered broker dealer subsidiaries handle either (bc they not registered).
— Eric Balchunas (@EricBalchunas) December 14, 2023
Further, he detailed that cash creates are worse for taxes because in this offering, cash would be changing hands as opposed to in-kind, which is basically a trade for crypto for ETF shares, with no cash exchanging hands. Citing another ETF specialist, also with Bloomberg, James Seyffart on this matter:
A superpower of the ETF structure is the tax efficiency derived from in-kind creations and redemptions, where underlying assets are exchanged directly for shares of the ETF [in] a non-taxable event.
Seyffart also indicated that cash creates are detrimental to one of the key participants in the ETF race, Grayscale, which has deep pockets full of BTC tokens bought at lower prices and would be looking to sell. In the case of cash creates where Grayscale is concerned, the fund must purchase and sell Bitcoin, which is a taxable event.
This could complicate the conversion of Grayscale’s GBTC into an ETF as the former holds many BTC tokens at a low-cost basis (bought at low prices) that would incur capital gains if sold under a cash-only model.
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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