SEC Advises Bitcoin ETF Firms on Cash Creations to Address Broker Concerns
Cash creation appears to be one solution the SEC is comfortable with to address concerns around broker-dealers directly handling Bitcoin.
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The Securities and Exchange Commission (SEC) has reportedly advised companies seeking to launch Bitcoin exchange-traded funds (ETFs) to amend their filings to switch to cash creations rather than in-kind creations, according to Bloomberg ETF analyst Eric Balchunas today.
Hearing chatter SEC’s Trading & Markets engaged w/ exchanges this week on spot bitcoin ETF 19b-4s, is advising them they'd like the ETFs to do cash creates (vs in-kind), and has asked them to get in amendments in next couple wks. This isn't unexpected but good sign nonetheless.
— Eric Balchunas (@EricBalchunas) November 17, 2023
To balance supply and demand, ETFs can create or redeem shares either in-kind, by exchanging Bitcoin for ETF shares, or with cash, by buying or selling Bitcoin on the open market.
Balchunas stated that the SEC’s Division of Trading and Markets spoke with exchanges this week regarding their Bitcoin ETF filings and recommended submitting amendments within the next couple of weeks specifying cash creations instead of in-kind.
The rationale is that broker-dealers currently cannot transact in Bitcoin directly due to regulatory restrictions, so cash creations place the onus on the ETF issuer to deal in Bitcoin. This prevents broker-dealers from needing to utilize unregistered subsidiaries or third parties to handle Bitcoin transactions. Overall, cash creation provides fewer limitations for broker-dealers.
Most of the recent Bitcoin ETF applicants had proposed utilizing in-kind creations. According to Balchunas, only 2-3 filers had planned for cash creations initially. This latest guidance from the SEC will likely require many filers to adjust their proposals and submit amendments to avoid potential delays in the approval process.
While this update does not directly impact the estimated 90% odds of a Bitcoin ETF being approved, it does signal that the process is advancing as the SEC works through logistical issues surrounding Bitcoin ETFs.