Bloomberg ETF analyst Eric wrote an article explaining the difference between Bitcoin spot BTC being created by physical objects or cash.

On December 14th, Eric Balchunas, an ETF analyst at Bloomberg, replied to a question on social media about the difference between physically-backed and cash-backed Bitcoin ETFs. He stated that when there is excessive demand for Bitcoin ETFs, authorized participants (APs) will need to create new ETF shares. They can either provide cash to the ETF issuer in exchange for new shares (which the issuer will use to buy BTC) or provide BTC to the issuer in exchange for shares. Either way, new ETF shares are equivalent to new BTC purchases.
The SEC wants ETFs to be cash-backed only because this means that only the ETF issuer can handle BTC, not the authorized participants (registered brokers cannot). They may also be reluctant to let unregistered broker-dealer subsidiaries handle any part of it (because they are not registered). However, cash-backed Bitcoin ETFs are not ideal and undermine a major advantage of the ETF structure. But it is still better than nothing, and hopefully they will soon be resolved in a physically-backed manner.