The SEC's Stance on Bitcoin ETFs and the Debate Over Cash Redemption.
What's the Difference Between Cash Creation and In-Kind Creation Units in ETFs?
Cash Creation:
Involves depositing cash equivalent to the net asset value (NAV) of creation units to be created.
The fund uses the deposited cash to purchase underlying assets, such as Bitcoin.
Provides flexibility for fund participants but may lead to slightly wider spreads and potential tax inefficiencies.
In-Kind Creation:
Participants deposit a basket of securities matching the ETF’s portfolio composition.
This model is more cost-effective and tax-efficient compared to cash creation.
The ETF can issue creation units without immediately selling securities for cash, avoiding bid/ask spreads and broker commissions.
The primary distinction lies in the form of consideration for creating new shares.
Cash creation involves actual cash deposits, offering flexibility but potentially leading to wider spreads and tax implications.
In contrast, in-kind creation uses a portfolio of securities, proving to be more cost-effective and tax-efficient.
SEC vs BlackRock.
As spot Bitcoin exchange-traded fund (ETF) applicants navigate the intricacies of filing details with the U.S. Securities and Exchange Commission (SEC), the regulatory landscape is shaping up, with the SEC strongly advocating for a "cash" redemption model. This push is evident in recent developments involving ETF applicants, Invesco and Galaxy, who have chosen to adopt a cash creation and redemption model, as highlighted in their updated S-1 filing on December 14.
While the SEC leans towards a cash redemption model for spot Bitcoin ETFs, some contenders, notably BlackRock, have proposed an alternative "in-kind" model. The difference lies in how ETFs create and redeem shares: cash creation involves depositing cash equivalent to the net asset value, allowing the fund to purchase underlying assets like Bitcoin. In contrast, the in-kind model sees participants depositing a basket of securities matching the ETF's portfolio composition.
Despite the efficiency of the in-kind model, avoiding bid/ask spreads and broker commissions, the SEC appears determined to prioritize cash redemption. Bloomberg senior ETF analyst Eric Balchunas suggests that the SEC's commitment to cash creation is a significant signal, indicating a firm stance.
The ongoing debate raises questions about flexibility for fund participants, with the SEC seemingly pushing for uniformity in adopting cash creation and redemption. As major players like BlackRock engage with the SEC and advocate for alternative models, the final decisions will likely shape the future of Bitcoin ETFs and potentially receive batch approval in early January, according to industry analysts.