Bitcoin ETF applicants must sport cash redemption model

The United States SEC is showing a clear preference for a cash redemption model in spot Bitcoin ETFs.

Notably, Invesco and Galaxy Digital have recently updated their filings to align with this model, indicating a broader industry shift.

This development was highlighted on Dec. 14 by finance lawyer Scott Johnsson. The updated S-1 filings of these firms now show a commitment to cash transactions to create and redeem ETF shares. This move signals a significant pivot in handling Bitcoin ETFs, contrasting with the in-kind redemption model proposed by firms like BlackRock.

The distinction between these two models lies in their operational mechanics. In a cash creation model, participants deposit cash equivalent to the net asset value of the created ETF units, which the fund then uses to purchase assets like Bitcoin (BTC). On the other hand, the in-kind model involves depositing a basket of securities that mirror the ETF’s portfolio, avoiding immediate cash transactions.

While the in-kind model is often viewed as more efficient, avoiding certain spreads and commissions, the cash model offers greater participant flexibility. Despite its potential drawbacks, such as wider spreads and tax inefficiencies, the cash model is still seen as an improvement over traditional financial platforms.

Bloomberg senior ETF analyst Eric Balchunas indicated that the SEC’s preference for the cash model is becoming increasingly evident. This trend is further substantiated by the SEC’s ongoing deliberations with various asset managers, including BlackRock, Grayscale, and Fidelity, as they finalize their spot Bitcoin product offerings.

The SEC’s decision on approving a spot Ether ETF for Invesco and Galaxy Digital, initially slated for Dec. 13, has been postponed. However, analysts anticipate a batch approval of spot BTC products in early January.