BlackRock, ARK Invest, and Others Opt for Cash Redemption After SEC Pushback

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Companies like BlackRock and ARK Invest have revised their spot Bitcoin (BTC) ETF filings to include cash redemption models, signaling a shift in response to SEC demands.

The move comes as the Securities and Exchange Commission (SEC) deadline of January 10 to approve or deny a spot Bitcoin ETF is fast approaching.

In updated filings, it has become evident that the SEC is requesting cash redemption models for these funds, which would be the first to track physically backed bitcoin instead of bitcoin futures contracts.

BlackRock, ARK Invest, and other firms have recently switched from various in-kind redemption models to cash redemption in their filings.

BlackRock to Temporarily Set Aside In-Kind Redemption

BlackRock, as the world’s largest asset manager, submitted an amended S-1 filing on Monday, indicating its decision to temporarily set aside the preferred in-kind redemption mechanism and instead offer cash creation and redemption options to investors.

Initially, BlackRock had filed for the ETF to include in-kind redemptions, which would have allowed investors to redeem their fund shares for the bitcoin held within the investment vehicle.

However, under the revised cash model, the firm will now convert the crypto asset into cash when returning shares to investors, as mandated by the SEC.

“The Trust issues and redeems baskets on a continuous basis. These transactions will take place in exchange for cash,” it wrote in the filing.

“Subject to the in-kind regulatory approval, these transactions may also take place in exchange for bitcoin.”

In-Kind and Cash Redemption Models Difference

The choice between in-kind and cash redemption models for spot bitcoin ETFs has potential implications for the fund’s overall cost.

Most ETFs employ the in-kind redemption model, enabling issuers to swap the ETF’s underlying assets with a market maker rather than conducting transactions in cash.

The cash redemption model, which incurs higher transaction costs, could potentially make the product more expensive for investors, according to Bryan Armour, an ETF analyst at Morningstar.

Speculating on the SEC’s motive behind the cash redemption requirement, Armour suggests that the commission may not want broker-dealers to directly handle bitcoin.

By enforcing cash redemption and having the fund trade cash for bitcoin, the SEC can maintain oversight of the entire process from the exchange to the fund, even if broker-dealers are barred from handling the crypto asset.

BlackRock and Grayscale had previously presented an in-kind redemption model to the SEC, while Hashdex, a Brazilian crypto investment firm, had proposed a cash redemption model.

However, Matt Hougan, chief investment officer of Bitwise Asset Management, believes that the decision to enforce cash redemptions is not a make-or-break factor for launching the first spot bitcoin ETFs.

“From a 30,000-foot view, what matters is, do we have an ETF? Or do we not have an ETF? And all these nuances are, are we on the 95 yard line?” he said.