BlackRock and Grayscale recently bitcoin-etf”>met with the Securities and Exchange Commission (SEC), presumably to discuss approval requirements for its bitcoin spot ETF applications.
Coinbase, which offers bitcoin brokerage and custody products, bitcoin-etf-service-can-anyone-else-join-the-race/?”>has emerged as the proposed custodian for the bitcoin assets of several ETF applicants. BitGo CEO Mike Belshe recently bitcoin-etf-rejections-quite-likely-bitgos-belshe-says/”>raised concerns about Coinbase's dual role as an exchange and custodian. Although his position is clearly aligned with his own self-interest, given that BitGo is a custodian that does not operate an exchange, Belshe warned that Coinbase's dual role could lead to the SEC rejecting those requests.
Despite these concerns, analysts they have confidence that the SEC will approve some applications before January 10, which is the ARK 21Shares application deadline (BlackRock's is March 15). The SEC could even approve all applicants at once, assuming the spot ETFs share the same structure.
Many btc-etf-impact/#:~:text=In%20terms%20of%20price%20impact,flows%20and%20asset%20price%20changes.”>show off that the exchange rate of bitcoin against the dollar will increase significantly along with the early approval of bitcoin spot ETFs. Analysts bitcoin-etf/”>estimate that tens of billions of dollars will flow into bitcoin ETFs annually, from stockbrokers, banks, and registered investment advisors (RIAs).
However, uncertainty remains over how spot bitcoin ETFs will work. The central question is whether the SEC will allow ETF issuers to offer in-kind redemptions.
With in-kind redemptions, shareholders can exchange shares for bitcoin. This would allow issuers to compete directly with established platforms and exchanges whose users often take custody of their Bitcoins after purchasing them. In-kind redemption would broaden the appeal of spot bitcoin ETFs and allow buyers to benefit from one of bitcoin's most important benefits. bitcoin-a-bearer-asset”>powerful properties – self-custody.
Most Spot bitcoin ETF Applicants want offer repayments in kind instead of cash (sell shares for cash), as it allows them to access a larger market. However, ETF analysts recently declared that the SEC is likely advising companies to modify their applications to make refunds in cash rather than in kind.
A cash refund structure requires fewer steps and fewer partners for issuers during the refund lifecycle, which is why the SEC likely prefers it to in-kind. Cash swaps also keep more users within the confines of traditional finance and reduce the number of people taking custody of their bitcoin. The SEC may prefer this structure to prevent value from leaving the traditional financial system, which aligns with its role in overseeing conventional markets.
Interestingly, the SEC published a memorandum describing his Nov. 20 meeting with BlackRock about the company's proposed spot ETF. The memo included two slides that BlackRock presented to the agency. The slides detail an in-kind and cash reimbursement model, indicating that BlackRock, arguably the most influential spot ETF applicant, and the SEC have not agreed on a reimbursement structure.
On November 28, the SEC published other BlackRock meeting memorandum presenting a revised in-kind model, indicating ongoing negotiations between the parties. Since then, other issuers have also met with the SEC. On December 7, Fidelity met with the agency and share detailed creation and in-kind exchange models.
Still, even if the SEC forces applicants to use a cash model for faster approval, they could move to an in-kind model later if regulators approve it.
Today, the most common “exchangeable” ETF products are precious metals. Physical gold trusts, for example, allow shareholders to exchange shares for physical gold once they reach a certain threshold. However, that threshold is quite high. For Sprott Physical Gold Trust, shareholders must possess an amount equivalent to one London Good Delivery bar (approximately 400 ounces of gold, which costs around $800,000 today) to qualify for an exchange request.
bitcoin's digital nature makes it much easier to transport than gold, so redemption thresholds for spot ETFs wouldn't have to be as high. However, if those thresholds were to exceed a few hundred dollars, it would prevent many consumers from redeeming their shares for bitcoin.
The recent introduction of bitcoin spot ETFs demonstrates the increasing integration of bitcoin with traditional finance. In-kind reimbursement versus cash reimbursement is one of the issues that regulators and traditional financial players must resolve to bring such products to market. Although the SEC's decisions will shape the immediate future of the spot ETF, in the long term, new models must be developed to align such financial products with consumer desires and regulatory requirements, while allowing individuals and the economy generally benefit from the custody innovations that bitcoin allows.
This is a guest post by David Waugh. The opinions expressed are entirely their own and do not necessarily reflect those of btc Inc or bitcoin Magazine.
