Recent reports have confirmed that the United States Securities and Exchange Commission (SEC) has introduced a “new regulatory standard” for all applicants of Bitcoin Spot Exchange-Traded Funds (ETFs) while awaiting approval from the regulatory body. This latest development, dubbed the “Cash Redemption Model,” is seen as a significant shift in the SEC’s approach to approving ETF applications. The model requires authorized participants to deposit funds in the ETF equal to the net asset value of the creation units to be created, with these funds subsequently used to purchase the underlying asset, Bitcoin.
This new standard stands in contrast to the model proposed by several other issuers, which is referred to as the “in-kind” model. In the in-kind model, participants deposit a collection of securities that mirror the ETF’s portfolio. This allows investors to receive creation units from the fund without the immediate need to sell the securities for cash. While the SEC has not outright rejected the in-kind model, it appears to be demanding the cash redemption model as the primary option for Bitcoin Spot ETFs.
Financial lawyer Scott Johnsson shared a screenshot revealing that Invesco, one of the major players in the ETF market, has recently adopted the cash creation and redemption standard for its ETF. The company anticipates that initial transactions will be carried out in cash, but it may consider allowing in-kind transactions in the future.
Blackrock, another prominent ETF issuer, has made adjustments to its Spot Bitcoin ETF application to introduce an in-kind redemption model called “Prepay.” This modification aims to address the challenges faced by financial institutions in holding cryptocurrencies. The “Prepay” model enables authorized participants to issue new fund shares using cash instead of strictly relying on Bitcoin. The funds utilized in this process can then be converted into Bitcoin through an intermediary and stored by the ETF’s custody provider. This adjustment opens up opportunities for banks that cannot directly hold cryptocurrencies to participate in the ETF market.
The SEC’s decision to impose the cash redemption model for Bitcoin Spot ETFs has important implications for the digital asset industry. By requiring cash deposits, the model aims to prevent potential market manipulation and provide a layer of protection against risks associated with cryptocurrencies.
The adoption of the cash redemption model by major ETF issuers like Invesco and Blackrock indicates a broader shift in the industry. These firms recognize the potential benefits of utilizing cash instead of relying solely on Bitcoin for ETF transactions. This adjustment not only facilitates the participation of traditional financial institutions but also streamlines the creation and redemption process for ETF investors.
The SEC’s new regulatory standard for Bitcoin Spot ETF applicants marks a significant development in the crypto industry. The introduction of the cash redemption model as the primary option for ETF transactions reflects the SEC’s cautious approach toward cryptocurrencies. Nevertheless, the adoption of this model by prominent ETF issuers signals a more inclusive market that accommodates traditional financial institutions while still providing protection against potential risks. As the industry continues to evolve, it is crucial for companies and investors to stay informed and adapt to emerging regulatory standards.