The SEC’s Trading & Markets division and investment asset management company BlackRock met again to discuss the former’s spot Bitcoin ETF application, according to Bloomberg ETF analyst Eric Balchunas.
BlackRock and the SEC meet Once more
A week ago, BlackRock and the SEC first met to discuss whether to use the “in-kind” redemption model or the cash model summary for the upcoming ETF offering. The SEC recommended that applicants for spot Bitcoin ETFs use cash creation for the ETFs rather than the in-kind redemption model.
By sharing a document, the well-known investment manager attempted to clarify the differences between the two models. Ultimately, it was clear that BlackRock favors the in-kind redemption model, just like a lot of other potential spot Bitcoin ETF candidates. Their inclination stems from the idea that this model would lessen the limitations imposed on broker-dealers.
Balchunas reported that the investment manager this time around gave the regulator a “revised” in-kind model design that was based on feedback from its staff. As per the memo, the main focus of the meeting between the two parties was the proposed rule change by NASDAQ Stock Market LLC for listing and trading shares of the iShares Bitcoin Trust.
Remarkably, the regulator appears to be a little uneasy about BlackRock’s choice of in-kind redemption model. Concerns have been raised regarding how it may affect the balance sheet and the risks to the Market Maker’s broker/dealer entity in the United States (MM-BD). Thus, an updated version of the in-kind model is being presented.
BlackRock’s Updated In-Kind Framework
The MM-BD places an order through an Authorized Participant (AP) for the current in-kind redemption flow, and the ETF issuer then approves the order. The next sentence reads, “MM-crypto borrows cash or Bitcoin to sell short cash or Bitcoin futures.” The ETF shares are then sent by the MM-BD via the AP to a Transfer Agent.
In the meantime, under the updated in-kind model, the MM-crypto gives the MM-BD cash first, and the MM-BD gives the ETF shares to the agent for transfers. The issuer then gives the BTC custodian instructions to move the coin to the MM-crypto, closing the short position in Bitcoin.
In addition to many other advantages, this model meets the needs of investors by offering reduced transaction fees, increased resistance to market manipulation, and decreased operating event risk. This meeting and BlackRock’s adaptable approach demonstrate how determined the banking behemoth is to allay the regulator’s concerns in order to secure approval for the highly sought-after product.
