United States: Bitcoin ETFs To Launch In The US: SEC Concerned

In 2024, the U.S. anticipates the introduction of Bitcoin Exchange-Traded Funds (ETFs). Concerns arise as the SEC mandates cash redemptions over standard in-kind transactions, adding complexity and increased costs for issuers. In our news alert, we explore the implications of this pivotal shift in the cryptocurrency market.

In 2024, Bitcoin Exchange-Traded Funds ("ETFs") are expected to become live in the United States, most likely in mid-to-late January. Concerns are raised, though, because the SEC is forcing ETF issuers to deviate from standard in-kind transactions and utilize cash instead of Bitcoin for redemptions. Although this brings ETF prices into line with the value of Bitcoin, it also adds complexity and increases costs for issuers, which may turn off retail investors.

Recent ETF Discourse: What is It?

ETFs are investment instruments traded on exchanges, similar to traditional financial instruments such as commodities, bonds, or stocks.

Bitcoin ETFs, which have recently garnered significant attention, are financial instruments enabling the trading of Bitcoin on traditional stock exchanges. They provide traditional investors with access to the cryptocurrency market.

Due to regulatory requirements and security concerns, ETFs have quickly drawn the attention of regulatory authorities.

Concerns

Due to the SEC's ruling on Bitcoin ETFs, which insists on cash redemptions rather than the usual in-kind transfers utilized by other ETFs, some anxiety has arisen. This shift mandates the issuers to incur higher charges when converting Bitcoin into cash and vice versa, aiming to align ETF prices with the value of Bitcoin. It has been reported that prominent investment management companies, Fidelity and BlackRock, have sought authorization for both cash and in-kind redemptions. However, the rationale behind the SEC's decision remains unclear. Consequently, retail investors may now perceive Bitcoin ETFs as less appealing and more expensive due to this ruling.¹

Discussions

Asset managers, including BlackRock and Nasdaq, have engaged in discussions with the U.S. Securities and Exchange Commission (SEC) regarding operational aspects of potential spot Bitcoin ETFs. The redemption procedure is a major source of disagreement; while issuers like BlackRock and Ark advocate for in-kind redemption, the SEC favors cash redemption. In in-kind redemption, market makers receive Bitcoin in exchange for ETF shares, enhancing tax efficiency. On the other hand, cash redemption involves selling investors' shares and returning the value in cash. The SEC's preference for cash redemption is seen as a way to sidestep complexities associated with broker-dealers transacting in Bitcoin directly. The resolution of these discussions will impact the approval and structure of Bitcoin ETFs.²

Developments

In response to concerns raised by the SEC regarding possible market manipulation and liquidity in the Bitcoin market, BlackRock is adjusting its Bitcoin ETF redemption scheme. The adjustment includes incorporating of a "cash create" redemption mechanism, allowing approved participants to redeem shares for cash instead of Bitcoin. In a similar effort to address SEC concerns and enhance the appeal of their proposed Bitcoin exchange-traded funds, other companies, such as ARK Invest and 21Shares, have also submitted updated filings.³

In discussions with the SEC regarding a potential spot Bitcoin ETF, BlackRock and other financial firms aim to secure approval for the proposal by 2024. Disagreements with the SEC stem from the redemption model, with the SEC favoring a "cash" redemption model over an "in-kind" one. This preference raises questions concerning taxable events and increased investor tax obligations. The SEC's historical resistance to in-kind redemptions complicates the ongoing talks. Some observers say the anticipated January outcome may greatly affect the market, potentially driving Bitcoin prices to $100,000. Certain analysts believe that the current price is not sustainable, and they expect future cycles to be influenced by events such as the halving of Bitcoin in 2024.⁴

A revised S-1 filing⁵ provides more details on BlackRock's proposed spot Bitcoin ETF, set to trade under the symbol IBIT^6, featuring a continuous creation and redemption process. According to the document, BlackRock will prioritize the SEC's preferred cash redemption model, considering an "in-kind" procedure as a backup plan. Analyst Eric Balchunas interprets BlackRock's action as a dedication to a cash-only strategy, potentially settling the redemption model debate. BlackRock may opt for the "in-kind" option for portfolio flexibility, although the SEC appears to favor a cash model. Other companies like WisdomTree and Ark 21Shares have also filed updated applications for their proposed spot Bitcoin funds. Despite growing optimism, the SEC has not yet approved a Bitcoin ETF.⁷

Rumors suggest that several spot Bitcoin ETF applications could receive approval from the SEC in January. BlackRock's decision and modifications made by companies like ARK 21Shares have been influenced by the SEC's preference for cash redemptions, which are considered safer and more accessible than in-kind redemptions. Many companies are actively seeking approval despite delays in other ETF applications.⁸

Conclusion

Summing up, it is emphasized that the SEC's preference for cash redemption is aimed at navigating challenges tied to broker-dealers directly engaging with Bitcoin. However, this decision could reduce the appeal of Bitcoin ETFs for average investors, affecting their availability and market cost. Many companies have responded by integrating a cash creation and redemption method favored by the SEC into their Bitcoin ETF proposals to address regulatory concerns and enhance approval prospects.

As versatile financial instruments, ETFs can be structured to track a single commodity price or a diverse collection of securities. Known for their cost-effectiveness and liquidity compared to mutual funds, ETFs have sparked the interest of traditional investors in cryptocurrency investments, allowing them to easily partake in the cryptocurrency market on traditional stock exchanges, similar to buying stocks, which marks a significant development.

Looking forward, this trend may signify broader recognition of cryptocurrencies, potentially accelerating their impact and the legalization process, ultimately integrating them into our everyday lives.

References

AK, Q. (2023, December 19). Cash or Kind? BlackRock's Proposed IBIT for Spot Bitcoin ETFs Causes Debate. Retrieved from Coinpedia: https://coinpedia.org/news/blackrocks-bitcoin-etf-the-ticker-revealed-in-sec-filing/

McCarthy, A. M. (2023, November 22). BlackRock among Bitcoin ETF hopefuls pushing back against SEC redemption requirements. Retrieved from DL News: https://www.dlnews.com/articles/markets/blackrock-and-bitcoin-etf-hopefuls-push-back-against-sec/

Napolitano, E. (2023, December 19). BlackRock Revises Spot Bitcoin ETF Proposal Ahead of Hoped-for SEC Approval. Retrieved from CoinDesk: https://www.coindesk.com/markets/2023/12/19/blackrock-revises-spot-bitcoin-etf-proposal-ahead-of-rumored-sec-approvals/

Roberts, J. J. (2023, December 18). The SEC attaches a string to Bitcoin ETFs—and investors will be the one to pay for it. Retrieved from yahoo! finance: https://finance.yahoo.com/news/sec-attaches-string-bitcoin-etfs-151014197.html?guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAANcGcJLhcCguZMiI43jG5gOwDNr
_f6Msqx5FKumOGyOdWYCxggTsI6Xf6DYL-_Fw-EuTVbf9N_gj1X0tB7ec3rn983_J6EZluoM-rOksOwuT

SEC Pushback Forces BlackRock To Modify Bitcoin ETF's Redemption Model. (2023, December 19). Retrieved from cryptojobs.co: https://www.cryptojobs.co/crypto-news/5856/sec-pushback-forces-blackrock-to-modify-bitcoin-etfs-redemption-model

Toppa, S. (2023, December 14). BlackRock, SEC Clash Over Redemption Model for Bitcoin ETF. Retrieved from thestreet.com: https://www.thestreet.com/crypto/markets/blackrock-sec-clash-over-redemption-model-for-bitcoin-etf

What Is S-1 IPO Filing? (2021, April 30). Retrieved from DFIN: https://www.dfinsolutions.com/knowledge-hub/knowledge-resources/what-s-1-ipo-filing#:~:text=An%20S%2D1%20Form%20is,the%20company%20with%20the%20SEC.

Wynn, S. (2023, December 18). BlackRock's proposed spot bitcoin ETF gets a ticker in latest filing with SEC. Retrieved from The Block: https://www.theblock.co/post/268274/blackrocks-proposed-spot-bitcoin-etf-gets-a-ticker-in-latest-filing-with-sec

Footnotes

1. (Roberts, 2023)

2. (McCarthy, 2023)

3. (SEC Pushback Forces BlackRock To Modify Bitcoin ETF's Redemption Model, 2023)

4. (Toppa, 2023)

5. The S-1 filing is a type of financial statement and application process submitted to the U.S. Securities and Exchange Commission (SEC) to initiate a company's initial public offering (IPO) process. The S-1 Form is a document set that includes general information about the company, its financial condition, business model, management structure, risk factors, and other important information related to the IPO. (What Is S-1 IPO Filing?, 2021)

6. "IBIT" is the proposed trading symbol for BlackRock's spot Bitcoin ETF, as per the revised S-1 filing (AK, 2023)

7. (Wynn, 2023)

8. (Napolitano, 2023)

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