The Securities and Exchange Commission has been working with well-known investment firms like Fidelity and BlackRock to iron out the technical details of a potential spot bitcoin exchange-traded fund (ETF). This could mean that the agency is almost done debating whether or not to approve the product.
Memos reveal that during the last few weeks, firms have met with the agency to discuss specifics regarding the redemption procedure for a spot bitcoin ETF. Professor of finance at Indiana University Vivian Fang stated that it appears the SEC is currently in an inspection phase and working out the specifics for a potential approval.
November 28, BlackRock representatives convened with the organization to deliberate on its iShares Bitcoin Trust and showcased a blueprint for a purported “Revised, According to Fang, the “In-Kind” model may allow the asset manager greater latitude in the event that investors wish to exchange their shares for the underlying asset.
Using the analogy of a basket of eggs, Fang dissected the possible configurations of a spot bitcoin ETF in an interview. Three different models for figuring out who would have to liquidate bitcoin in the event of a redemption are at stake. According to Fang, investors would receive cash back when they redeemed their shares regardless of the model.
Model of in-kind redemption
According to Fang, asset managers are well-versed in the “in-kind” redemption model because stock-based exchange-traded funds (ETFs) typically employ it. According to that plan, retail investors who wish to redeem their shares would receive their bitcoin back from BlackRock, which they could subsequently exchange for cash through a broker-dealer.
Conversely, the SEC probably prefers the so-called cash model, which calls for BlackRock to remove the bitcoin from storage, sell it immediately, and then return the investor’s money.
A memo regarding Fidelity’s recent meeting with the SEC indicates that the company has also appeared to be leaning toward an in-kind redemption model.
“Asset managers are highly acquainted with a kind of model that carries little risk,” Fang stated.
The level of risk that BlackRock, or any other issuer, is willing to assume determines how the models differ from one another.
Investors don’t want to bear the conversion risk, for instance, if an asset manager holds 100 eggs and they all want their eggs back, according to Fang.
“You want your one egg back, I’ll give you your one egg back, I don’t have to immediately care about how much that egg is selling for now, it can be $5, it could be $10, but I’m holding one egg for you and you’re getting one egg back when you want it,” Fang stated.
The updated model
BlackRock presented a revised plan during the November meeting that would lessen the impact of large collective redemptions on the ETF and allow the asset manager to hold bitcoin holdings without having to immediately liquidate them upon demand.
according to Fang, for more freedom in managing the investment portfolio without having to pay capital gains taxes.
“Basically the only difference is that in the cash model you have to sell bitcoin to raise that cash,” Fang stated. “Under the revised in kind model, I’m making a cash payment right now; you don’t need to worry about when or how I sold bitcoin to obtain this money. You give me control over the selling portion.”
According to Fang, the updated model might be sufficient to appease the SEC. From the perspective of the investor, there is no distinction between the updated in-kind model and the cash model.
“They never want investors to reach a stage where they feel the need to convert their nest eggs into cash because they cannot,” Fang uttered.
Fidelity and BlackRock declined to comment. A request for comment from the SEC was not answered.
