As Spot Bitcoin exchange-traded fund (ETF) issuers iron out details of their filings with the United States Securities and Exchange Commission (SEC), the regulator appears steadfast in demanding a “cash” redemption model instead of an alternative model proposed by other issuers such as BlackRock.
The Cash Redemption Model
On Dec. 14, finance lawyer Scott Johnsson said that ETF applicants Invesco and Galaxy became the latest to bend the knee to using a cash creation and redemption model for their ETF.
Understanding the Models
An ETF can create and redeem shares in two ways: cash creation or redemption and in-kind creation or redemption. The cash creation model involves the authorized participant depositing cash in the ETF equivalent to the net asset value of the creation units to be created.
In-Kind Creation: An Alternative Approach
For in-kind creations, the participant deposits a basket of securities matching the composition and weighting of the ETF’s portfolio, avoiding bid/ask spreads and broker commissions.
Industry Response to SEC’s Stance
Bloomberg senior ETF analyst Eric Balchunas commented on the latest filing as a significant indication of the SEC’s firm stance on cash creation models for ETFs.
BlackRock’s Challenge
In late November, BlackRock met with the SEC to discuss ETF share creation and redemption mechanisms, presenting a revised or hybrid in-kind model design.
The Road Ahead
As the SEC delays its decision on approving a spot Ether ETF for Invesco and Galaxy Digital, representatives from several asset managers, including BlackRock, Grayscale, and Fidelity, continue to negotiate the final details for their spot BTC products.
