As the value of Bitcoin (BTC) hovers around $43,182, issuers of exchange-traded funds (ETFs) are finalizing their applications with the U.S. Securities and Exchange Commission (SEC). The SEC is firmly advocating for a cash redemption approach, diverging from the alternative methods suggested by some issuers, including BlackRock.
On December 14, finance attorney Scott Johnsson revealed that Invesco and Galaxy Digital, two ETF applicants, have agreed to adopt a cash creation and redemption model for their ETFs. This was confirmed in their recent S-1 filing update with the SEC, stating, “The trust expects that creation and redemption transactions will initially be in cash.”
The SEC has been consistently favoring a cash redemption model for spot Bitcoin ETFs, contrasting with proposals from some applicants like BlackRock who prefer an “in-kind” model. ETFs can issue and redeem shares either through cash or in-kind methods. In a cash creation model, the authorized participant provides cash equivalent to the net asset value of the ETF’s creation units, which the fund then uses to buy the underlying asset, such as Bitcoin.
In contrast, in-kind creations involve depositing a basket of securities that mirrors the ETF’s portfolio composition and weighting. This process allows the fund to issue creation units without immediately converting the securities to cash.
The in-kind model is often viewed as more efficient for ETFs, avoiding bid/ask spreads and brokerage fees associated with selling securities to generate cash for share issuance. However, the cash creation model offers greater flexibility for fund participants.
Highlighting the differences to an X (formerly Twitter) user, Seyffart mentioned that the cash model could lead to wider spreads and potential tax inefficiencies, but it would still be an improvement over current traditional finance (tradfi) options. Bloomberg’s senior ETF analyst Eric Balchunas pointed out that the latest filings strongly suggest the SEC’s preference for cash creation ETFs, a sentiment he’s also heard through informal channels.
Balchunas noted the anticipation around whether BlackRock could influence the SEC’s stance on in-kind creation. However, Seyffart added, “I think everyone is gonna have to bend the knee to cash creates and redeems.”
In late November, BlackRock discussed ETF share creation and redemption mechanisms with the SEC, proposing a revised or hybrid in-kind model, favoring it over cash creations. Seyffart also mentioned that Bitwise has been prepared for cash-only creations/redeems since December 4, despite previously considering both in-kind and cash options in their documents. On December 13, the SEC postponed its decision on approving a spot Ether ETF for Invesco and Galaxy Digital.
Additionally, representatives from various asset managers, including BlackRock, Grayscale, and Fidelity, have recently met with the SEC to finalize details for their spot BTC products, anticipating a collective approval in early January.
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