BlackRock, Nasdaq and SEC are Discussing Listing Terms for Bitcoin ETF

B Key Takeaways

• Competitors and SEC win out after BlackRock ditched in-kind for costlier cash redemption in Bitcoin ETF.
• Despite initial attempts, BlackRock abandons its in-kind redemption proposal, leaving this method’s future murky.
• The SEC appears more open to approvals, potentially leading to multiple spot Bitcoin ETFs in January (excluding GBTC).

BlackRock has revised its filing for a Bitcoin (BTC) spot Exchange-Traded Fund (ETF), making significant adjustments to comply with federal regulators’ requirements on the tracking of Bitcoin’s price by its fund shares.

The updated S-1 form , submitted on Monday, December 18, outlines that new shares in the trust will exclusively be created using cash. This approach, as per financial experts, is less tax-efficient compared to the “in-kind” method, where redemptions and creations are based directly on Bitcoin.

Bitcoin ETFs on Hold as Cash Reigns, Grayscale Waits in Wings

Following a trend among its competitors, BlackRock has adjusted its strategy for its ETF application, shifting to a cash-creation model for new shares. This move aligns with similar changes made by other ETF applicants, including ARK Invest and 21Shares. Their application, featuring this pivot, is set for a final decision by January 10.

The filing  says:

“These transactions will take place in exchange for cash. Subject to the In-Kind Regulatory Approval, these transactions may also take place in exchange for bitcoin.”

BlackRock, Grayscale, and other ETF applicants have engaged in multiple discussions with staff from the United States Securities and Exchange Commission (SEC), focusing on the appropriate share redemption model for their proposed spot Bitcoin ETFs.

BTC ETF Hopefuls Bow to SEC Concerns, Embrace Cash Creation

Asset managers typically prefer the in-kind model for share redemptions and creations because it offers a more streamlined process and minimizes tax complexities. However, the SEC has concerns  about this model. The regulatory body believes that in-kind redemptions could pose balance sheet risks for registered broker-dealers who execute these transactions. This is because it requires them to hold and directly interact with BTC. This, in turn, introduces potential financial and operational risks.

During a meeting with the SEC in November, BlackRock proposed an alternative in-kind model aimed at mitigating the balance sheet risks. Despite this effort to address regulatory concerns, the proposal did not yield an immediate resolution or acceptance from the SEC.

Bloomberg ETF analyst Eric Balchunas : “That’s basically a wrap. Debate over. In-kind will have to wait.” 

SEC Cracks Open Vault?

Under BlackRock’s cash model, Coinbase, acting as the custodian, will still have to hold actual Bitcoin to back the value of the ETF’s shares. This approach could have an advantage over existing Bitcoin futures ETFs, offering direct exposure to Bitcoin for many investors.

The SEC’s long-standing refusal to approve spot Bitcoin ETFs has been under reconsideration, especially in light of its recent legal setback in a case against Grayscale. This has prompted the agency to reevaluate relevant applications more openly.

Despite this shift, Balchunas anticipates the simultaneous approval of multiple ETF applications in the next month. However, he has expressed doubts about whether the Grayscale Bitcoin Trust (GBTC) would be part of this initial round.

Adding to the discussion, James Seyffart, a partner analyst, observed  that WisdomTree’s Bitcoin ETF application still mentions the possibility of in-kind redemptions. This suggests there is a diversity what different ETF applicants are proposing.