Bitcoin spot ETF applicants will almost certainly be forced by regulators to adopt an “in-cash” redemption model for their fund’s shares, according to Bloomberg ETF analyst Eric Balchunas.
When asked how negotiations between the Securities and Exchange Commission (SEC) and various fund managers were progressing on the matter, Balchunas said that cash creates were a “done deal” based on “chatter” he’d been hearing, and the recent, relevant updates within many issuers’ S-1 applications.
“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),” wrote Balchunas in a post to X on Thursday.
When there is excess demand for a bitcoin ETF an intermediary (“the AP”) will need to create new ETF shares. With cash creates they give ETF issuer cash for new shares (issuer then buys btc) vs in-kind they give issuer btc for shares. Either way new ETF shares=new btc purchase. https://t.co/C7jKdTIzEb
— Eric Balchunas (@EricBalchunas) December 14, 2023
A redemption model refers to the plumbing of how an ETF will keep the trading value of its shares in line with that of the underlying assets that it tracks.
When price dislocations occur due to excess demand, a dedicated intermediary/broker-dealer must provide the issuer with funds so that it can issue new shares to meet that demand.
The question, however, is whether those intermediaries should directly send the issuer BTC, or if it should issue cash, which the issuer uses to buy BTC by itself. According to the SEC, this helps avoid balance sheet risks created by broker-dealers directly interacting with BTC.
Yet for funds like BlackRock, Ark, and others, an “in-kind” BTC-based redemption model would be more streamlined, and also avoid tax-efficiency complications around the issuer liquidating their BTC for cash.
“In-kind is more tax efficient for everyone,” added Bloomberg analyst James Seyffart on the matter. “Cash is overly complex & inefficient.”
BlackRock’s SEC Meetings
Major competitors like BlackRock and Grayscale have both pushed the SEC for an In-Kind redemption model across multiple private meetings with the agency in recent weeks.
As a long-time holder of BTC for clients, many suspect that Grayscale holders will suffer the most under an in-cash model.
BlackRock has already proposed a revised in-kind redemption model meant to address the SEC’s concerns about balance sheet risk for its U.S. registered broker-dealers, though the SEC has seemed unresponsive thus far.
On Thursday, the firm met with the SEC for a fourth time, this time including a public policy expert from Blackrock who used to work with the same market regulator.
On the whole, markets remain positive that Bitcoin spot ETF approvals are on the horizon. On Thursday, SEC chairman Gary Gensler said his agency was taking a “new look” at ETF applications in light of their court loss to Grayscale in August.
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