Regulators to Require “Cash-Create” Model for Bitcoin ETFs
According to Bloomberg ETF analyst Eric Balchunas, regulators will likely require Bitcoin (BTC) ETF applicants to adopt a “cash-create” model before launching their investment products. This decision would have significant implications for fund management costs and the fees passed on to customers.
In-Kind vs In-Cash Redemption Models
BlackRock and other applicants have been in discussions with the Securities and Exchange Commission (SEC) regarding their redemption models. Sponsors like BlackRock prefer an “In-Kind” model, where registered intermediaries transfer BTC directly to the ETF issuer when new fund shares are needed. However, the SEC prefers a cash-create model, where intermediaries send cash to the issuer for purchasing BTC. This prevents intermediaries from handling real BTC, which is not allowed by regulators.
Balchunas explains that the cash-create model is less favorable for taxes because it involves cash changing hands, unlike in-kind trades. This could potentially disrupt one of the major advantages of an ETF structure.
Early Capital Gains Tax
Under the cash-create model, ETF issuers would be subject to capital gains taxes when selling their fund’s BTC. Bloomberg analyst James Seyffart suggests that this could force ETF holders to recognize gains earlier than they would have otherwise.
The Grayscale Bitcoin Trust (GBTC) may be particularly affected by this change upon conversion to an ETF since it has been holding clients’ BTC at much lower prices for years.
Based on internal discussions and updated ETF filings, Balchunas believes that cash-create ETFs are likely to become a reality.
Hot Take: Implications of a Cash-Create Model for Bitcoin ETFs
Requiring Bitcoin ETF applicants to adopt a cash-create model before launching their investment products could have significant implications. While this model may address regulatory concerns about intermediaries handling real BTC, it comes with drawbacks.
Firstly, the cash-create model would increase the cost of managing each fund, which could lead to higher fees for customers. Additionally, executing cash-to-BTC conversions would subject ETF issuers to capital gains taxes, potentially forcing investors to recognize gains earlier than expected.
Overall, this decision highlights the ongoing regulatory challenges surrounding Bitcoin ETFs and the need for careful consideration of redemption models that balance compliance and efficiency.
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