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BlackRock ETF Changes: Tracking How Investment Firm is Bending for the SEC

Last Updated December 19, 2023 4:14 PM
James Morales
Last Updated December 19, 2023 4:14 PM
  • A string of last-minute amendments suggest BlackRock is close to finalizing its spot Bitcoin ETF application
  • Key changes include the move to cash redemptions and a mixed, cash and crypto basket creation model.
  • Recent updates also focus on security and AML compliance.

Through a series of changes to its application to list a spot Bitcoin Exchange Traded Fund (ETF) on the Nasdaq, BlackRock has revealed what the Securities and Exchange Commission (SEC) needs to see before it can approve the new ETF type.

The latest amendments attend to the specific details of BlackRock’s application, suggesting the firm is closing in on a format that will meet all of the SEC’s strict requirements.

Private Keys Kept in Cold Storage

In its initial application, BlackRock proposed that the ETF’s Bitcoin custodian used a mix of hot and cold storage solutions, using a “hot vault balance” to fund the trading account responsible for redemptions.

Under the latest proposals, however, the Bitcoin custodian will hold all the private keys associated with the fund’s Bitcoin in cold storage.

Noting that the use of cold wallets “is intended to make them more resistant to hacking,” BlackRock’s amended custody proposal places a greater emphasis on security, even if it might create additional friction in the redemption process.

Basket Creation Changes

In ETF jargon, “baskets” refer to batches of shares issued to investors. In the case of BlackRock’s proposed bitcoin ETF, shares can only be issued or redeemed in baskets of 40,000.

Previously, the creation of a basket was solely dependent on delivering a specific amount of Bitcoin. However, the latest changes introduce a more complex structure that determines a cash amount and a Bitcoin amount for each basket issued.  

Underlining a shift towards a more cash-focused operational model, the change allows for the creation of dynamic baskets that accommodate cash and Bitcoin in varying proportions depending on market conditions.

Move from Crypto to Cash Redemptions

As well as changing the way baskets are created, BlackRock’s amended filing replaces the original Bitcoin-based redemption model with cash redemptions.

In recent weeks, the issue of cash vs. crypto redemptions emerged as one of the sticking points holding up BlackRock’s application. 

In the end, the firm bent to the SEC’s demands for cash redemptions. However, it maintained the possibility of making baskets redeemable in BTC if allowed by the regulator at a later date.

Higher AML Compliance Bar 

BlackRock has amended its approach to managing the anti-money laundering (AML) risks entailed by Bitcoin transactions.

Instead of delegating responsibility for sanctions screening to its primary Bitcoin broker, Coinbase, Blackrock has now committed to a more comprehensive, end-to-end onboarding process, enforcing strict AML compliance for all involved parties.

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