Jannat Ara

Shift in Bitcoin ETF Applications: SEC Demands Cash Redemption Model

The Securities and Exchange Commission (SEC) has mandated a critical alteration for Bitcoin exchange-traded fund (ETF) applicants, requiring the integration of a cash redemption mechanism within their proposed structures.

This development was brought to light on Dec. 14 by finance attorney Scott Johnsson, who highlighted recent updates from Invesco and Galaxy Digital. Both companies have adjusted their S-1 filings to align with this model, signifying a broader shift within the industry.

The revised filings by these firms now emphasize a commitment to utilizing cash transactions for the creation and redemption of ETF shares, diverging from the in-kind redemption approach previously proposed, notably by BlackRock.

The operational mechanics between these two models differ significantly. The cash creation model involves participants depositing cash equivalent to the ETF units’ net asset value, which the fund then utilizes to purchase assets like Bitcoin (BTC). Conversely, the in-kind model entails depositing a basket of securities mirroring the ETF’s portfolio, avoiding immediate cash transactions.

While the in-kind model is typically considered more efficient due to avoiding certain spreads and commissions, the cash model offers greater participant flexibility. Despite potential downsides such as wider spreads and tax inefficiencies, the cash model is perceived as an advancement over traditional financial platforms.

Bloomberg’s senior ETF analyst, Eric Balchunas, suggested a growing preference by the SEC for the cash redemption model. This trend is reinforced by the ongoing discussions between the SEC and asset managers like BlackRock, Grayscale, and Fidelity as they finalize their spot Bitcoin product offerings.

Although the SEC’s decision on approving a spot Ether ETF for Invesco and Galaxy Digital was originally scheduled for Dec. 13 but postponed, analysts anticipate a collective approval of spot BTC products in early January.

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