The SEC is pushing Bitcoin ETF issuers down the cash create route for creation and redemptions, but BlackRock has other ideas.
As spot Bitcoin exchange-traded fund (ETF) issuers iron out details of their filings with the U.S. securities regulator, it appears that the SEC is steadfast in demanding a
“cash” redemption model rather than alternative model proposed by other issuers, such as BlackRock.
On Dec. 14 finance lawyer Scott Johnsson said that ETF applicant Invesco has become the latest to bend the knee to using a cash creation and redemption model for its ETF.
“The trust expects that creation and redemption transactions will take place initially in cash,” read their updated S-1 filing with the SEC.
The federal regulator has seemingly been pushing for a cash redemption model for spot Bitcoin ETFs,
though some applicants, including BlackRock, have proposed using an “in-kind” model.
What’s the difference?
An ETF can create and redeem shares in two ways — cash creation/redemption and in-kind
creation/redemption. A cash creation model is one where the authorized participant deposits cash in the
ETF equivalent to the net asset value of the creation units to be created. The fund then uses this cash to purchase the underlying assets, in this case Bitcoin.
For in-kind creations, the participant deposits a basket of securities matching the composition and
weighting of the ETF’s portfolio. This allows the fund to issue creation units to the investor without immediately selling the securities for cash.
This model is seen as more efficient for ETFs as it avoids bid and ask spreads and broker commissions
from selling the basket just to raise cash for issuing shares; however, cash creation provides more flexibility for fund participants..
Explaining the difference to a Twitter user, Seyffart said the cash model leads to: “Slightly wider spreads. Potential tax inefficiencies. It will be better than anything currently available on tradfi rails.”