Bitcoin ETFs Navigate SEC's Consistent Cash Redemption Demand, Ethereum ETF Decision Deferred to 2024

As the race for spot Bitcoin exchange-traded fund (ETF) approval heats up, the battleground now centers on the redemption model demanded by the U.S. Securities and Exchange Commission (SEC).

Recent developments reveal a consistent push by the SEC for a "cash" redemption model, despite alternative proposals put forth by issuers like BlackRock.

Finance lawyer Scott Johnsson highlighted Invesco's latest move, signaling its compliance with the SEC's preference for a cash creation and redemption model. In an updated S-1 filing with the SEC, Invesco outlined its expectation for initial creation and redemption transactions to occur in cash.

This insistence on a cash redemption model for spot Bitcoin ETFs stands in contrast to proposals advocating for an "in-kind" creation model, notably BlackRock's approach.

Understanding the disparity between the two models is crucial; a cash creation model entails authorized participants depositing cash equivalent to the ETF's net asset value, enabling the fund to purchase underlying assets like Bitcoin.

Conversely, in an in-kind creation, participants deposit a basket of securities mirroring the ETF's portfolio, allowing the issuance of creation units without immediate sale of the securities for cash.

While the in-kind model is perceived as more efficient, avoiding bid/ask spreads and broker commissions, the cash creation offers greater flexibility for fund participants.

Insights from Bloomberg's senior ETF analyst, Eric Balchunas, indicated the SEC's entrenched stance favoring cash creation. Balchunas hinted at insider knowledge suggesting the SEC's unwavering stance on allowing only cash-created ETFs initially.

The hope that BlackRock might sway the regulator with its in-kind creation proposal seems to be fading. Seyffart suggested a general concession to the SEC's preference for cash creation among ETF applicants.

Despite BlackRock's efforts in presenting a revised hybrid in-kind model during discussions with the SEC, indications point toward a prevailing sentiment that cash-based creation and redemption will prevail.

While the SEC postponed its decision on a spot Ether ETF for Invesco and Galaxy Digital, representatives from major asset managers have engaged with the SEC to finalize details for their spot BTC products, anticipating a batch approval in early January. This regulatory tussle signifies a pivotal moment in the evolution of crypto ETFs and their route to market.

On another note, the SEC announced a delay in the decision regarding the approval or disapproval of a spot Ether (ETH) exchange-traded fund (ETF) proposed by Invesco and Galaxy Digital. The SEC extended the evaluation period, stating a need for further consideration on the proposed rule change, allowing the Cboe BZX Exchange to list and trade shares of the Invesco Galaxy Ethereum ETF.

This ETF proposal is among several under the SEC's scrutiny, marking the commission's ongoing evaluation of vehicles offering direct exposure to cryptocurrencies like Bitcoin (BTC).

With a history of not yet approving any ETF directly linked to digital assets, the SEC has set February 6, 2024, as the deadline to make a definitive decision or initiate proceedings to determine the fate of the proposed rule change.