Major asset managers revise ETF application to comply with SEC’s cash redemption model

Major U.S. asset managers are tweaking their Bitcoin exchange-traded fund applications to meet the U.S. Securities and Exchange Commission’s cash redemption model, hoping to launch the first-ever spot Bitcoin ETF in the country.

According to reports, BlackRock, Cathie Wood’s ARK Invest and WisdomTree are revising their proposals. Instead of the initially proposed in-kind redemptions for Bitcoin, they are switching to cash redemptions, the standard for non-monetary ETF payments.

This move could be fueled by rumors of potential ETF approvals in January, as the SEC has previously shown a warmer reception to similar ETF applications compared to those using a different redemption model.

Cathie Wood’s ARK Invest and BlackRock submitted their updated S-1 registration statements to the SEC on December 18.

ARK’s registration statement suggested that its ARK 21Shares Bitcoin ETF would primarily facilitate cash creations and redemptions. The document mentioned the “potential in-kind creation and redemption of shares,” indicating that the ETF might also allow authorized participants to create and redeem shares through in-kind transactions after pending regulatory approval.

BlackRock’s submission also includes conditions for non-cash dealings with pending SEC approval. As outlined in the iShares Trust ETF S-1 amendments, these transactions will predominantly involve cash but might involve exchanging for Bitcoin.

With the revised cash redemption model, BlackRock investors will receive the monetary value of their shares upon selling rather than Bitcoin directly. However, this model still hinges on the Nasdaq Stock Market obtaining approval to conduct in-kind creation and redemption of shares using Bitcoin.

“Subject to the Nasdaq Stock Market receiving the necessary regulatory approval to permit the trust to create and redeem shares in-kind for Bitcoin, these transactions may also take place in exchange for Bitcoin,” BlackRock’s iShares Bitcoin Trust ETF S-1 amendment reads.

Compliance for approval

In mid-December, finance lawyer Scott Johnsson forecasted that ETF applicants would eventually need to adopt a cash creation and redemption model for their ETFs. Invesco and Galaxy were among the early ETF applicants who updated their S-1 registration statements, transitioning to a “cash-only” model.

The forecast is correct, as ARK and its ETF partner 21Shares initially avoided cash creations and devised a creative alternative to do in-kind redemptions. According to Bloomberg’s ETF analyst Eric Balchunas, if these asset managers concede, it signals the SEC’s stance is firm.

“That’s basically a wrap. Debate over. In-kind will have to wait,”

Eric Balchunas, Bloomberg ETF analyst.

While these applications have a higher likelihood of approval, concerns remain about whether cash redemptions can effectively safeguard investors from Bitcoin’s price volatility. This uncertainty arises from the potential for their asset values to fluctuate due to Bitcoin’s unpredictable price swings.

To date, several companies have sought bitcoin ETFs in response to the growing demand in the industry. However, in prioritizing investor protection, the SEC has expressed concerns about the risks linked to crypto innovation, particularly market manipulation and certain approaches.

The SEC’s stringent oversight and imposed requirements remain a regulatory uncertainty within the crypto industry. Despite pressure for approvals, the commission remains committed to performing thorough scrutiny. It aims to protect the interests of potential investors expected to engage once the asset gains final approval.

In response to this development, prominent investor Vance Harwood said the SEC’s stance is understandable. According to Harwood, cash transactions mean eligible participants can only obtain additional ETF shares by submitting the required amount of money.

He also agreed with the SEC’s reluctance to include in-kind creation in the Spot Bitcoin ETF for transparency benefits. Omitting in-kind transfers would compel ETFs to purchase from accredited exchanges, enabling more straightforward tracking. Conversely, allowing in-kind transfers might obscure the Bitcoin’s source, posing tracking challenges.