The SEC and Investment Firms Discussing Technical Details for Bitcoin ETF
The Securities and Exchange Commission (SEC) and major investment firms like BlackRock and Fidelity have been in talks to work out the technical details for a potential spot bitcoin exchange-traded fund (ETF). This indicates that the agency may be nearing a decision on whether to approve such a product.
According to memos, these firms have been meeting with the SEC to discuss how the redemption process would function for a spot bitcoin ETF. Vivian Fang, a finance professor at Indiana University, suggests that the SEC is currently in an inspection period and finalizing details for potential approval.
BlackRock’s “Revised In-Kind” Model
BlackRock presented a plan for its iShares Bitcoin Trust during a meeting with the SEC. The plan outlines a “Revised In-Kind” model that offers greater flexibility for the asset manager when investors want to redeem their shares for the underlying asset. This model allows BlackRock to move bitcoin out of storage, sell it, and provide cash back to investors.
Potential Structures of a Spot Bitcoin ETF
In an interview, Vivian Fang explains that there are three potential models for determining which entity would liquidate bitcoin in the event of redemption. Regardless of the model chosen, investors would receive cash when redeeming their shares.
In-Kind Redemption Model
Fang highlights the “in-kind” redemption model commonly used by asset managers in stock-based ETFs. In this model, retail investors who want to redeem their shares would receive bitcoin from BlackRock, which can then be converted into cash through a broker-dealer.
The Cash Model
On the other hand, the SEC seems to favor a cash model that would require BlackRock to sell bitcoin immediately and return the cash to the investor.
Fidelity’s Approach
Fidelity seems to lean towards an in-kind redemption model, according to a memo detailing their recent meeting with the SEC.
The Difference Lies in Risk
The difference between these models lies in the risk assumed by BlackRock or any other issuer. Fang explains that asset managers prefer models with minimal risk.
The Revised Model
BlackRock’s revised plan aims to reduce the impact of large redemptions on the ETF and provide greater flexibility in managing the portfolio without incurring capital gains taxes. This model does not require immediate liquidation of bitcoin upon demand.
Potential Approval by the SEC
Fang suggests that the revised model might be enough to satisfy the SEC, as there is no difference from the investor’s perspective between the cash model and the revised in-kind model.
Hot Take: Progress Made Towards Bitcoin ETF Approval
The recent discussions between the SEC and major investment firms like BlackRock and Fidelity indicate that progress is being made towards the approval of a spot bitcoin ETF. The technical details, including the redemption process, are being hashed out, suggesting that a decision may be imminent. While different models are being considered, all aim to ensure that investors can easily convert their shares into cash when desired. If approved, a spot bitcoin ETF could provide increased accessibility and exposure to cryptocurrency for investors.
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