US SEC’s Cash Redemption Model For Bitcoin ETF: What To Know

Complying With Cash Redemption

Bitcoin exchange-traded fund (ETF) applicants are working on their proposals with the US Securities and Exchange Commission (SEC). However, the regulator remains steadfast in its preference for a “cash” redemption method over other alternatives.

Finance attorney Scott Johnsson recently stated that Invesco and Galaxy, two ETF applicants, have selected a cash creation and redemption approach for their ETF following the SEC’s preference. Their most recent SEC filing states, “The trust anticipates that transactions for creating and redeeming shares will initially involve cash.”

Meanwhile, BlackRock and other applicants have proposed a different approach, preferring an “in-kind” method in which ETF shares are created and redeemed using assets other than cash. The SEC’s position emphasizes the importance of using cash to create and redeem shares within the ETF structure.

So far, Invesco and Galaxy have adjusted their strategies to reflect the regulator’s preference for a cash-based system.

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What To Know

ETFs can create or cancel shares in two ways: cash and in-kind. In the cash method, an authorized participant deposits money equal to the unit value of the ETF. This cash is then used to purchase assets such as Bitcoin.

The in-kind method requires the participant to deposit a mix of securities corresponding to the ETF’s portfolio. This allows the fund to create units without immediately selling the securities for cash.

These methods have advantages. In-kind creation avoids additional costs such as bids, spreads, and broker fees associated with trading securities to obtain some money for shares. However, cash creation provides fund participants with greater flexibility.

Meanwhile, Bloomberg ETF analyst, James Seyffart, explained on X that the cash model may result in “slightly wider spreads.” He also mentioned “possible tax inefficiencies” associated with this method.

Nonetheless, he expects it to outperform what is currently available through traditional finance channels. ETFs use these methods to handle shares efficiently. In addition, cash creation accommodates flexibility, whereas in-kind invention avoids additional costs, making both options advantageous for different reasons.

Seyffart’s analysis expands the trade-offs between wider spreads and potential tax issues, ultimately highlighting the benefits of each method.

SEC’s Cash-ETF Stance

According to Eric Balchunas, a senior ETF analyst at Bloomberg, the SEC insists on allowing only cash creation for initial ETF runs. During a November meeting, BlackRock discussed revised or hybrid models to persuade the SEC to favor in-kind creation.

However, Seyffart believes the industry has to adjust to cash-creation-dominated ETF launches. Bitwise began using cash-only creations and redemptions earlier this month, a departure from their previous practice of including in-kind and cash methods. Nevertheless, the securities watchdog postponed its decision on Ether ETF approval for Invesco and Galaxy Digital earlier this week.

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Meanwhile, analysts predict a flurry of approvals in early January 2024. These industry meetings and changes reflect an ongoing dialogue between regulators and key players.

It also signals efforts to navigate the complexities of ETF creation mechanisms, particularly crypto-based offers.

Author: Owen Clark

Owen Clark, a seasoned crypto newsman and broker, deciphers the intricacies of the digital currency realm, empowering investors with his astute analysis and actionable insights.

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