As Bitcoin exchange-traded fund (ETF) issuers work on their filings with the United States Securities and Exchange Commission (SEC), the regulator is standing firm in its demand for a “cash” redemption model instead of alternatives proposed by issuers like BlackRock.
On December 14, finance lawyer Scott Johnsson revealed that ETF applicants Invesco and Galaxy have now adopted a cash creation and redemption model for their ETFs.
Their updated S-1 filing with the SEC stated, “The trust expects that creation and redemption transactions will take place initially in cash.”
The SEC has been advocating for a cash redemption model for spot Bitcoin ETFs, while some applicants, including BlackRock, have suggested an “in-kind” model.
So, what’s the difference? A cash creation model involves authorized participants depositing cash equivalent to the net asset value of the creation units.
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The fund uses this cash to purchase the underlying asset, such as Bitcoin. In contrast, the in-kind creation model involves participants depositing a basket of securities that match the ETF’s portfolio, allowing the fund to issue creation units without immediately selling the securities for cash.
The cash model may result in slightly wider spreads and potential tax inefficiencies but offers greater flexibility for fund participants.
Bloomberg senior ETF analyst Eric Balchunas believes the latest filing indicates the SEC’s determination to allow only cash-created ETFs initially.
He mentioned that many were waiting to see if BlackRock could persuade the regulator to consider in-kind creation, but analyst Seyffart suggests that most issuers may eventually adopt the cash creation and redemption model.
In late November, BlackRock met with the SEC to discuss ETF share creation and redemption mechanisms, presenting a revised hybrid in-kind model that favored this method over cash creations.
Bitwise has also shifted towards cash-only creation and redemption since December 4, despite initially having both in-kind and cash options in their documents.
The SEC recently delayed its decision on approving a spot Ether ETF for Invesco and Galaxy Digital.
Representatives from asset managers like BlackRock, Grayscale, and Fidelity have been meeting with the SEC to finalize details for their spot BTC products, with analysts anticipating batch approvals in early January.
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