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Bitcoin ETFs: BlackRock and Other Firms Choose Cash Redemptions

Walter Swift

ByWalter Swift

Dec 22, 2023

Businesses such as BlackRock and ARK Invest have adjusted their spot Bitcoin (BTC) ETF submissions by incorporating cash redemption frameworks, indicating a response to demands made by the SEC.

This strategic move, demonstrated by these revisions on December 18, 2023, signifies a departure from the previous in-kind redemptions towards a cash creation and redemption model. Additionally, the alteration arrives as the January 10th deadline rapidly approaches.

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 BlackRock, ARK Invest, and Co Conform to SEC’s Demands

Major players in the market, including BlackRock and ARK Invest, amended their S-1 registration statements to adhere to the regulations imposed by the SEC.

In-kind redemptions usually involve transactions without monetary exchanges, such as utilizing Bitcoin (BTC). Also, the shift aligns with the established standards by the United States Securities and Exchange Commission (SEC).

 The ARK Invest registration statement mentions the ARK 21Shares Bitcoin ETF, emphasizing the transition to accepting only cash creations and redemptions. While the statement allows for potential in-kind agreements, this is subject to regulatory approval. 

Similarly, BlackRock submitted an amended S-1 filing, indicating its move from the preferred in-kind redemption mechanism to offering cash-creation redemption options to investors.

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BlackRock had initially sought in-kind redemptions for the ETF, allowing investors to exchange their fund shares for the Bitcoin held within the investment vehicle. However, under the revised cash model, the firm will convert the crypto asset into cash while returning shares to investors, as mandated by the SEC.

 Due to insistence by the SEC on a “cash-only” strategy, authorized participants in these exchange-traded funds (ETFs) must now provide cash to purchase more shares. Unlike the “in-kind” technique, where investors can directly exchange the ETF-monitored asset (in this case, Bitcoin) for ETF shares, the cash-only approach ensures transparency in sourcing Bitcoin for the exchange-traded fund (ETF), which will acquire Bitcoin from reputable exchanges.

There have been varied industry reactions. Eric Balchunas, the Bloomberg ETF analyst, notes that BlackRock, ARK, and its partner 21Shares initially resisted the cash generation approach, proposing an alternative in-kind redemption mechanism. 

However, their eventual compliance underscores the stringent stance, regulatory potentially paving the way for early approval.

 This shift is part of a broader trend where entities issuing exchange-traded funds (ETFs), like WisdomTree, a global ETF provider, have been mandated to align with the cash redemption option. The strategic shift among major firms like BlackRock and ARK Invest signifies a substantial adaptation to regulatory constraints, possibly ushering in a new phase in the evolution of Bitcoin exchange-traded funds.

Difference Between In-Kind and Cash Redemption Models

The selection between in-kind and cash redemption models in spot bitcoin ETFs could carry potential implications regarding overall expenses per operation. Typically, most ETFs utilize the in-kind redemption model, enabling issuers to exchange the ETF’s underlying assets with a market maker rather than engaging in cash transactions. 

According to Bryan Armour, an ETF analyst at Morningstar, the cash redemption model, entailing higher transaction costs, might elevate the product’s expense for investors. Armour speculates on the SEC’s rationale behind mandating cash redemption, suggesting that the commission might aim to prevent broker-dealers from directly managing Bitcoin. 

By enforcing cash redemption and having the fund exchange cash for bitcoin, the SEC retains oversight of the entire process, spanning from the exchange to the fund, even if broker-dealers can’t handle the crypto asset because of restrictions.

Previously, BlackRock and Grayscale proposed an in-kind redemption model to the SEC, while Hashdex, a Brazilian crypto investment firm, put forth a cash redemption model.

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Walter Swift

Walter Swift

Walter Swift is an adept crypto writer, known for his deep insights into the decentralized world. His pieces artfully break down complex blockchain topics, making them accessible to a broad audience. With a passion for emerging technologies, Walter's articles are a beacon for crypto enthusiasts and novices alike.

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