Invesco Adopts Cash Redemption Model for Bitcoin ETF as SEC Shows Preference
Summary:
Bitcoin ETF issuers are working out their submissions to the U.S. Securities and Exchange Commission (SEC), with clear indications of the regulator's preference for a 'cash' redemption model. The latest firm to conform to the cash model is Invesco, suggesting the inevitability of other firms following suit. Despite alternative proposals like the in-kind model, the SEC appears resolute in its stance. Experts note that while the in-kind model offers efficiency, the cash creation model provides more participant flexibility. This situation has grabbed the attention of various asset management firms, expediting their preparations for spot Bitcoin products.
Bitcoin Exchange-Traded Fund (ETF) issuers are working out the specifics of their submissions to the U.S. Securities and Exchange Commission (SEC), amidst clear indications that the regulator prefers a 'cash' redemption model to counterproposals from issuers such as BlackRock. Scott Johnsson, a legal expert in finance, disclosed on December 14 that Invesco, an ETF applicant, is the most recent firm to succumb to the cash creation and redemption framework for its ETF.
This approach, according to an update to their SEC S-1 filing, will facilitate initial transactions being completed in cash. The authorities have been leaning towards this model for Bitcoin ETFs, despite alternatives from some applicants, including BlackRock, who suggested an 'in-kind' model. The distinction between the two is that an ETF can create and redeem shares in two ways - via cash creation/redemption and in-kind creation/redemption. The cash creation model involves the authorized participant depositing cash into the ETF, equivalent to the net asset value of the new units. The fund then uses this cash to acquire the underlying assets, in this case, Bitcoin.
In the case of in-kind creations, the participant remits a collection of securities that align with the ETF portfolio's configuration and weightage, enabling the fund to issue units without needing to immediately sell the securities for cash. While this model is considered more efficient since it steers clear of bid and ask spreads and brokerage fees related to selling the basket for cash, the cash creation model offers more flexibility to fund participants.
Diving into the intricacies of these models, James Seyffart highlighted that the cash model results in somewhat wider spreads and potential tax inefficiencies, but is better than any existing traditional finance alternatives.
In assessing the recent filing, Eric Balchunas, a senior ETF analyst at Bloomberg, stated it's a significant indication that the SEC is firmly insisting on cash-generated ETFs for the initial run, a sentiment echoed through indirect communications. While many were interested in whether BlackRock could influence the regulator towards in-kind creation, Seyffart confirmed everyone would eventually have to adopt cash creation and redemption.
In late November, BlackRock held discussions with the SEC regarding ETF share creation and redemption processes, proposing a redesigned or hybrid in-kind model, favoring that to cash creations. Seyffart also called attention to Bitwise adopting the cash-only model from December 4, despite having options for in-kind or cash in their papers previously.
On December 13, the SEC differed its decision to approve or disapprove a spot Ether ETF for Invesco and Galaxy Digital. Recently, several asset management firms, including BlackRock, Grayscale, and Fidelity, have been in contact with the SEC to finalize details for their Bitcoin products, with expectations of a collective approval in early January.
Published At
12/14/2023 7:29:56 AM
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