The agency recently expressed its preference for cash redemption ETFs, but ETF issuers believe in-kind model is better for markets.
Investment management firms BlackRock and Ark Invest are leaning towards launching Bitcoin exchange-traded funds (ETFs) using in-kind creations and redemptions, defying guidance last week from the Securities and Exchange Commission (SEC) that recommended switching to a cash model.
BlackRock recently met with SEC staff to walk regulators through how both in-kind and cash redemption models could work for a Bitcoin ETF. According to a presentation reviewed by Bloomberg ETF analyst James Sayffart, BlackRock prefers the in-kind mode.
Last week, the SEC advised Bitcoin ETF issuers to update their filings to switch to cash creations rather than in-kind creations, according to Bloomberg ETF analyst Eric Balchunas.
However, this week Ark Invest and its founder Cathie Wood submitted an updated filing for a spot bitcoin ETF, ignoring the SEC’s recommendation to use cash creations. Ark appears to be sticking with in-kind creations and redemptions despite the SEC’s advice.
The SEC has expressed long-standing concerns about potential manipulation and illiquidity in bitcoin markets. Requiring cash creation was viewed as one way to mitigate some of those risks.
In an in-kind redemption, the redeeming party typically a market maker would receive Bitcoin directly from the fund in exchange for shares, allowing it to minimize the impact on the market prices of Bitcoin. However, for cash redemptions, the ETF needs to sell Bitcoin on the market to obtain the cash required to pay the redeeming party.
In-kind transactions are also preferred by ETF providers for their tax efficiency, as they can avoid the capital gains tax that might be incurred if Bitcoin was sold for cash.
