SEC Prefers Cash Redemption Models for Spot Bitcoin

As the Securities and Exchange Commission’s Jan. 10 deadline to approve or deny a novel spot bitcoin ETF approaches, firms are updating their filings to specify that their ETF redemption models will use cash creations. 

It appears through updated filings from firms such as BlackRock Inc. and ARK Invest that the agency is requiring cash redemption models for the funds, which would be the first to track physically backed bitcoin as opposed to bitcoin futures contracts. BlackRock, ARK and others switched from various models of in-kind redemptions to cash in their most recent filings.  

The SEC has so far denied bids for a spot bitcoin ETF, but a U.S. appeals court ruling in August that said the agency was wrong to block Grayscale Investments the opportunity to convert its Grayscale Bitcoin Trust (GBTC) into an ETF forced the commission to pivot its strategy on cryptocurrency. Since then, the SEC has been working with about a dozen firms that have filed applications for a spot bitcoin fund.  

In-kind vs. Cash Redemption For Spot Bitcoin ETFs

While a technical hang-up, the difference between an ETF that has a cash redemption model compared with an in-kind one could potentially affect how much the fund costs.  

Most exchange-traded funds use the in-kind redemption model, which allows issuers to swap the ETF’s underlying assets with a market maker instead of conducting the transaction in cash. Because a cash redemption model would have a higher transaction cost, it could make the product more expensive for investors, according to Bryan Armour, an ETF analyst at Morningstar. 

“My guess is that the SEC doesn't want broker-dealers to touch bitcoin, and then they also want to have a view into bitcoin from the exchange all the way to the fund,” Armour said. “So the only way to do that if broker-dealers can't touch it, is to just require cash and make the fund trade the cash buy and sell bitcoin themselves.” 

BlackRock and Grayscale both had previously presented a version of an in-kind redemption model to the SEC. Hashdex, a Brazilian crypto investment firm, was the only firm to originally propose a cash redemption model.  

Matt Hougan, chief investment officer of Bitwise Asset Management, noted in an interview with etf.com that the decision to enforce cash redemptions is not a make-or-break issue for rolling out 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?” he said.  

Contact Lucy Brewster at [email protected].