The Bitcoin ETF Race: Challenges with Fund Share Creation and Redemptions
As the competition for a Bitcoin ETF heats up, there are challenges surrounding the methods of fund share creation and redemptions. Regulators and issuers have differing preferences, creating contention in the industry. The Securities and Exchange Commission (SEC) has expressed reluctance to allow broker-dealers to handle Bitcoin, making it unlikely for them to approve an ETF with the typical redemption method called “in-kind.”
Understanding Bitcoin ETF Mechanics
There are two methods of ETF share creation and redemptions: cash creation and in-kind. In-kind redemptions involve exchanging the fund’s underlying assets, such as Bitcoin, with a market maker instead of transacting in cash. This method is favored by issuers as it avoids taxable events. On the other hand, cash redemptions require selling Bitcoin to distribute cash, creating taxable transactions.
Implications of Redemption Models
The SEC has shown a focus on redemption models in recent meetings with Bitcoin ETF issuers, indicating a possible insistence on cash creations and redemptions for approval. Cash redemptions could result in tax bills for investors and a loss of typical ETF tax efficiency.
Issuers’ Approach to Redemption Methods
Several Bitcoin ETF applicants have already agreed to cash creations and redemptions. Invesco, Galaxy, Valkyrie, and Bitwise have amended their SEC filings accordingly. However, BlackRock has proposed a revised in-kind model to the SEC.
Hot Take: Tax Implications Are Not Detrimental
The recent discussions about redemption methods and tax implications should not be seen as detrimental or horrible for most people involved in the crypto industry. While it may cause inconvenience, it is not a major issue. The focus should be on finding a suitable method that satisfies both regulators and issuers.
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