It appears that BlackRock and Grayscale recently met with the Securities and Exchange Commission (SEC) to discuss approval requirements for spot Bitcoin ETF applications.
Coinbase, which offers both Bitcoin custody and Bitcoin brokerage products, has been proposed as a custodian for the Bitcoin assets of several ETF applicants. BitGo CEO Mike Belshe recently raised concerns about Coinbase’s dual role as exchange and custodian. While his position clearly aligns with his own interests, since BitGo is a custodian and not an exchange operator, Belshe warned that Coinbase’s dual role could result in the SEC rejecting such applications.
Despite these concerns, analysts are confident the SEC will approve some applications by the ARK 21Shares application deadline of January 10 (BlackRock says March 15). Assuming the cash ETFs share the same structure, the SEC may approve all applicants at once.
Many assume that the Bitcoin-to-dollar exchange rate will rise significantly due to the anticipated approval of a spot Bitcoin ETF. Analysts estimate that tens of billions of dollars will flow into Bitcoin ETFs each year from broker-dealers, banks, and registered investment advisers (RIAs).
However, uncertainty remains as to how spot Bitcoin ETFs will work. The key question is whether the SEC will allow ETF issuers to offer in-kind redemptions.
In-kind redemption allows shareholders to redeem their shares with Bitcoin. This allows issuers to compete directly with existing exchanges and platforms where users often store Bitcoin after purchasing it. Spot redemptions expand the appeal of spot Bitcoin ETFs and allow buyers to benefit from one of Bitcoin’s strongest attributes: self-custodial rights.
Most spot Bitcoin ETF applicants want to offer spot money instead of cash redemption (selling shares for cash) so they can pursue a larger market. However, ETF analysts recently indicated that the SEC is likely to recommend that companies revise their applications to require cash repayments rather than in-kind repayments.
The SEC appears to prefer cash redemption structures over in-kind redemptions because they require fewer steps and fewer partners for the issuer during the redemption life cycle. Cashbacks also keep more users within the confines of traditional finance and reduce the number of individuals hoarding Bitcoin. The SEC may favor this structure to prevent value from escaping the traditional financial system. This is consistent with its role in overseeing existing markets.
Interestingly, the SEC published a memo summarizing its November 20 meeting with BlackRock regarding BlackRock’s proposed spot ETF. The memorandum includes two slides that BlackRock submitted to the agency. The slide details the in-kind redemption model and the cash redemption model, indicating that perhaps the most influential spot ETF applicant, BlackRock, and the SEC have not agreed on a redemption structure.
On November 28, the SEC published another BlackRock meeting note in which a revised spot model was presented, indicating ongoing negotiations between the parties. Since then, other issuers have also met with the SEC. Fidelity met with the agency on December 7 and shared specific spot creation and repurchase models.
However, even if the SEC forces applicants to use the in-kind model for faster approval, they can still switch to the in-kind model later if regulators approve it.
The most common “redeemable” ETF products today are precious metals products. For example, a physical gold trust allows shareholders to exchange their shares for physical gold once a certain threshold is reached. But the threshold is quite high. For the Sprott Physical Gold Trust, shareholders must own the equivalent of one London Good Delivery bar (about 400 ounces of gold, currently priced at about $800,000) to be eligible to request redemption.
Because Bitcoin’s digital nature makes it much easier to transport than gold, redemption thresholds for spot ETFs do not need to be as high. However, if that threshold exceeds a few hundred dollars, it could prevent many consumers from redeeming their shares for Bitcoin.
The recent introduction of spot Bitcoin ETFs demonstrates the growing integration of Bitcoin with traditional finance. Redemption in kind versus cash is one of the issues that traditional financial institutions and regulators must address to bring these products to market. While the SEC’s decision will determine the immediate future of physical ETFs, in the long term, a new model could align these financial products with consumer desires and regulatory requirements while allowing individuals and the economy as a whole to benefit from the custody innovation enabled by Bitcoin. must be developed.
This is a guest post by David Waugh. The opinions expressed are solely personal and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.