Amidst mounting pressure from the Securities and Exchange Commission (SEC) deadline on January 10, both BlackRock and ARK Invest have made significant revisions to their spot Bitcoin (BTC) ETF filings. These revisions now include cash redemption models, a clear indication of their response to the SEC’s demands.
Previously, the filings proposed in-kind redemption models, which allowed for the redemption of fund shares for the actual Bitcoin held within the investment vehicle. However, the SEC has requested cash redemption models, which would represent a shift towards physically backed Bitcoin rather than Bitcoin futures contracts.
As the world’s largest asset manager, BlackRock submitted an amended S-1 filing on Monday, signaling its decision to temporarily set aside the preferred in-kind redemption mechanism. Instead, it will offer cash creation and redemption options to investors. Under the revised cash model, the firm will convert the crypto asset into cash when returning shares to investors, as mandated by the SEC.
Implications for Spot Bitcoin ETFs
The choice between in-kind and cash redemption models for spot Bitcoin ETFs carries potential implications for the overall cost of the funds. Most ETFs utilize the in-kind redemption model, allowing issuers to swap the underlying assets of the ETF with a market maker, rather than conducting transactions in cash.
However, the cash redemption model incurs higher transaction costs and could make the product more expensive for investors. Bryan Armour, an ETF analyst at Morningstar, highlights this potential impact on costs.
“The cash redemption model could potentially make the spot Bitcoin ETF more expensive for investors due to higher transaction costs.”
– Bryan Armour, ETF analyst at Morningstar
It is speculated that the SEC’s motive behind requiring cash redemption is to restrict broker-dealers from directly handling Bitcoin. By enforcing cash redemption and having the fund trade cash for Bitcoin, the SEC can maintain oversight of the entire process, even if broker-dealers are barred from handling the crypto asset.
While BlackRock and Grayscale previously presented an in-kind redemption model to the SEC, Hashdex, a Brazilian crypto investment firm, proposed a cash redemption model. Matt Hougan, the chief investment officer of Bitwise Asset Management, believes that the decision to enforce cash redemptions is not a make-or-break factor for launching the first spot Bitcoin ETFs.
“From a 30,000-foot view, what matters is, do we have an ETF? Or do we not have an ETF? And all these nuances are, are we on the 95-yard line?”
– Matt Hougan, Chief Investment Officer of Bitwise Asset Management
