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Bitcoin ETFs: the Final Sprint – BlackRock Moves to Resolve SEC Redemption Objections, Grayscale Prepares for GBTC Upgrade

Last Updated November 30, 2023 12:22 PM
James Morales
Last Updated November 30, 2023 12:22 PM

Key Takeaways

  • BlackRock representatives met with SEC staff on Tuesday to discuss the issue of Bitcoin ETF redemptions.
  • The firm has made changes to its proposal to pay redemptions in BTC after the SEC objected to a previous plan.
  • Meanwhile, Grayscale has filed changes to its Bitcoin Trust that bring the GBTC in line with ETF standards.

In 2013, the Winklevoss twins submitted a filing to the US Securities and Exchange Commission (SEC), requesting permission to launch a new Exchange-Traded Fund (ETF) that would invest in Bitcoin. Their request was rejected. But now, more than ten years on from the first-ever Bitcoin ETF application, the SEC’s approval feels tantalizingly close. 

With Blackrock and Grayscale making final preparations ahead of the anticipated debuts of their respective funds, they appear to have reached the finishing stretch of a decade-long marathon.

BlackRock–SEC Meeting Attempts To Resolve ETF Redemptions Disagreement  

Among the various fund managers that have applied to list a spot bitcoin ETF in the US, 2 different redemption models have been proposed.

Following the established norm that US-listed shares are redeemed in dollars, some Bitcoin ETF applicants have also proposed cash redemptions. The Majority, however, want to issue in-like redemptions that pay investors in BTC.

During recent meetings with the regulator, BlackRock has petitioned the SEC to allow crypto redemptions.

After an initial proposal was shut down, on Tuesday, November 28, the firm’s representatives presented the SEC with a revised model for in-like redemptions. 

According to a Blackrock presentation , the SEC had initially expressed concern over the redemption process’ impact on US-registered broker/dealers’ balance sheets.

In a bid to address the regulator’s concerns, the fund manager has proposed introducing an extra step in the redemption process that will see the affected broker/dealer receive cash payments from the cryptocurrency market maker before it transfers any ETF shares.

The amendment ensures that the broker/dealer’s balance sheet never has liabilities greater than the value of its assets while still ensuring that it doesn’t have to handle Bitcoin directly at any stage of the redemption process.

Although the revised 7-step redemption model may seem complicated, BlackRock insists that it is still more streamlined than redeeming shares in dollars, which it said would require 10 steps.

Blackrock Bitcoin ETF redemptions
Blackrock’s revised model for BTC redemptions.

Given the lengthy redemption processes Blackrock and its peers have designed in order to satisfy the SEC’s strict rules, it’s no wonder Grayscale’s existing Bitcoin Trust (GBTC) eschews redemptions altogether.

However, as it prepares to convert GBTC into an ETF, the firm has proposed updates to the Trust’s model that lay the groundwork for future share redemptions.

Grayscale Prepares To Convert Bitcoin Trust Into An ETF

In an SEC filing  submitted on Wednesday, November 29, Grayscale put forward a plan to allow a portion of GBTC’s assets to be held in one or more omnibus accounts in order to facilitate the creation and redemption of shares.

“While this proposal is not a prerequisite to the Trust receiving approval or operating as an exchange-traded fund (ETF),” Grayscale noted, it believes the ability to utilize such omnibus accounts “will nonetheless provide operational efficiencies.”

Meanwhile, a second proposed change relates to how often Grayscale receives the management fees it levies from the GBTC. From once a month, the firm wants to transition to daily fee collection. For now, the fee itself won’t change, only the frequency of payments. However, more frequent fee collection could become important for Grayscale’s cash flow if it moves to the daily redemption and issuance model required by ETFs.

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