Bitcoin Spot ETFs Likely to Adopt “In-Cash” Redemption Model, Says Expert
According to Bloomberg ETF analyst Eric Balchunas, regulators will most likely require Bitcoin spot ETF applicants to implement an “in-cash” redemption model for their fund’s shares. Balchunas stated that based on recent updates in many issuers’ S-1 applications and the negotiations between the Securities and Exchange Commission (SEC) and fund managers, cash creates are a “done deal.” The SEC’s preference for cash creates is to ensure that only the ETF issuer handles BTC and not intermediaries. This eliminates balance sheet risks associated with broker-dealers directly interacting with BTC.
Understanding Redemption Models for ETFs
A redemption model refers to how an ETF maintains the trading value of its shares in line with the underlying assets it tracks. When there is excess demand, an intermediary must provide funds to the issuer for the creation of new shares. The question is whether these intermediaries should provide BTC directly or issue cash for the issuer to buy BTC. The SEC argues that cash creates mitigate balance sheet risks. However, BlackRock, Ark, and others prefer an “in-kind” BTC-based redemption model as it is more streamlined and tax-efficient.
BlackRock’s Efforts and SEC Meetings
Competitors like BlackRock and Grayscale have been advocating for an in-kind redemption model in private meetings with the SEC. Grayscale holders may be adversely affected by an in-cash model due to their long-term BTC holdings. BlackRock has proposed a revised in-kind redemption model to address balance sheet risk concerns but has received little response from the SEC. The firm recently had its fourth meeting with the SEC, including a public policy expert familiar with market regulation. Despite these discussions, there is optimism in the market that Bitcoin spot ETF approvals are on the horizon, especially after SEC Chairman Gary Gensler’s comments about reevaluating ETF applications.
Hot Take: Bitcoin Spot ETFs Likely to Adopt “In-Cash” Redemption Model
The adoption of an “in-cash” redemption model for Bitcoin spot ETFs seems imminent, according to industry expert Eric Balchunas. This model, which requires cash creates instead of direct BTC transfers, is favored by the SEC to mitigate balance sheet risks associated with intermediaries. While some funds prefer an “in-kind” BTC-based redemption model for its efficiency and tax benefits, negotiations indicate that regulators are leaning towards the cash creates approach. Competitors like BlackRock and Grayscale have been actively engaging with the SEC to push for their preferred redemption model. Despite concerns and ongoing discussions, there is overall optimism in the market regarding the approval of Bitcoin spot ETFs.
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