SEC Unlikely to Approve BlackRock’s ETF in its Current Form

• The SEC has tightened its stance, shaking up the Bitcoin ETF race.
• BlackRock’s hybrid redemption model has met resistance from the SEC.
• Market concerns have driven major players to adopt the SEC’s preferred ETF approach.

As the race for Bitcoin exchange-traded funds (ETFs) intensifies, the U.S. Securities and Exchange Commission (SEC) has made its stance clear: only cash redemption models will be considered for spot Bitcoin ETFs. This decision comes as ETF applicants like Invesco and Galaxy Digital have recently adopted cash creation and redemption models for their respective ETFs.

New SEC Filings Reveal a Cash-Centric Approach for ETFs

Their updated S-1 filings with the SEC state that “creation and redemption transactions will take place initially in cash.” The SEC’s preference for a cash redemption model stems from concerns over potential market manipulation and arbitrage opportunities associated with in-kind redemptions. 

The cash creation model involves authorized participants depositing cash equivalent to the net asset value of the creation units. The fund then uses this cash to purchase the underlying asset, such as Bitcoin . In contrast, the in-kind creation model allows participants to deposit a basket of securities that match the ETF’s portfolio, eliminating the need for the fund to immediately sell the securities for cash.

BlackRock’s Hybrid Redemption Model Won’t Be Reviewed

Despite the SEC’s stance, BlackRock has been advocating for a hybrid in-kind model, which combines elements of both cash and in-kind redemptions. However, Bloomberg senior ETF analyst Eric Balchunas believes that the SEC’s recent actions indicate a firm commitment to cash-created ETFs.

This view is supported by the fact that Bitwise, another ETF applicant, has also shifted towards a cash-only creation and redemption model. Bitwise initially had both in-kind and cash options in their filings, but has since opted for a fully cash-based approach.

On the Flipside

• The SEC’s insistence on cash redemption models for Bitcoin ETFs might limit market innovation by excluding potential diverse methods of investment.
• A strict preference for cash redemption could hinder the flexibility of ETF structures and their adaptation to changing market dynamics.
• While the SEC maintains that only cash redemption will be reviewed, this doesn’t guarantee acceptance for companies filing for an ETF with this cash redemption system.

Why This Matters

The SEC’s insistence on cash redemption for Bitcoin ETFs marks a pivotal regulatory stance, impacting major players like Invesco and Galaxy Digital. This shift signals a definitive move toward solidifying the operational structure of these investment vehicles, potentially setting a template for future ETFs and influencing market strategies.

To learn more about Bitcoin’s end-of-year outlook and its impact, read here:
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