A Professor Urges SEC to Embrace In-Kind Creation for Spot Bitcoin ETFs
A finance professor at Georgetown University, James Angel, has written a letter to the U.S. Securities and Exchange Commission (SEC) advocating for the use of the in-kind creation method for spot bitcoin exchange-traded funds (ETFs). The SEC has proposed the cash creation method, but industry players like Blackrock and Fidelity have argued in favor of in-kind creation. Professor Angel argues that cash-only creation/redemption would result in higher costs and mispricing risk for investors. He explains that in-kind creation eliminates trading costs and reduces execution risks for the ETF. The professor believes that the SEC should trust the judgment of ETF sponsors and resist micromanaging the creation/redemption process.
The Importance of Quick Approval
Professor Angel acknowledges that media reports suggest that the approval of a spot bitcoin ETF is imminent. He emphasizes that approving such ETFs quickly and properly would free up SEC resources for more important tasks. The professor urges the SEC to avoid a big mistake by considering cash-only creation/redemption. He argues that this method would impose costly frictions and result in wider bid-ask spreads and mispricing of the ETF. According to him, this would lead to higher costs and mispricing risk for investors.
The Benefits of In-Kind Creation
Angel explains that in-kind creation/redemption eliminates the transaction costs and execution risks associated with buying and selling bitcoin. Cash creation/redemption would require the ETF to bear the trading costs, including the bid-ask spread and operational costs. The professor highlights the timing costs involved in the risk of the bitcoin price moving between the establishment of NAV and the actual trading of bitcoin. He believes there is no need for shareholders to bear this execution risk when in-kind creation is an option.
Trust in ETF Sponsors’ Judgment
Professor Angel argues that the SEC should listen to the experience and expertise of ETF sponsors when it comes to the creation/redemption process. He believes ETF sponsors should have the freedom to accept bitcoin directly and that the SEC should not micromanage this process. Citing Blackrock and Fidelity, the professor points out the advantages of the in-kind model, such as lower transaction costs, resistance to market manipulation, reduction in operational risks, and simplicity. He concludes by urging the SEC not to force a suboptimal product (cash-only creation/redemption) on the market.
Hot Take: SEC Should Prioritize In-Kind Creation for Spot Bitcoin ETFs
A finance professor from Georgetown University has urged the SEC to embrace the in-kind creation method for spot bitcoin ETFs. He argues that cash-only creation/redemption would introduce higher costs and mispricing risk for investors, while in-kind creation eliminates trading costs and reduces execution risks. The professor believes that the SEC should trust the judgment of ETF sponsors and avoid micromanaging the creation/redemption process. Blackrock and Fidelity have also voiced support for in-kind creation, highlighting its benefits. As the approval of spot bitcoin ETFs seems imminent, the professor suggests that the SEC should not hinder this positive development by forcing a suboptimal cash-only creation/redemption method.
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