Key Insights:

• SEC’s preference for cash redemption in Bitcoin ETFs influences major issuers’ strategies, including Invesco and Galaxy.
• The industry adapts to regulatory demands, with significant players like BlackRock and Bitwise revising their ETF models.
• SEC’s cautious approach may delay approvals but anticipates a wave of new cryptocurrency ETF products in early January.

The U.S. SEC remains steadfast in its demand for a cash redemption model for Bitcoin ETFs, influencing major issuers like Invesco and Galaxy to align with these requirements. This move marks a significant development in the cryptocurrency ETF landscape as issuers navigate regulatory demands.

The Shift to Cash Creation and Redemption

In a recent update, finance lawyer Scott Johnsson disclosed that Invesco and Galaxy, two prominent ETF applicants, have revised their S-1 filings with the SEC. These updates reflect a shift to a cash creation and redemption model for their Bitcoin ETFs. This change signifies the issuers’ compliance with the SEC’s insistence on a cash-based model over the previously proposed “in-kind” model by other applicants, such as BlackRock.

In the cash creation model, authorized participants deposit cash equivalent to the net asset value of the creation units. The fund then uses this cash to purchase the underlying asset, in this case, Bitcoin. This approach contrasts with the in-kind creation model, where participants deposit a basket of securities matching the ETF’s portfolio, allowing the fund to issue creation units without immediately selling the securities for cash. While the cash model may lead to slightly wider spreads and potential tax inefficiencies, it provides greater flexibility for fund participants.

Industry Response and Analysis

Bloomberg senior ETF analyst Eric Balchunas commented on the significance of this development, viewing it as an indication of the SEC’s firm stance on allowing only cash-created ETFs initially. Analyst Seyffart also noted that most issuers might eventually adopt this model, reflecting the regulatory influence on the structure of Bitcoin ETFs.

On the same accord, in late November, BlackRock met with the SEC to discuss ETF share creation and redemption mechanisms, presenting a revised hybrid in-kind model. This proposal favored the in-kind method over cash creations, showcasing BlackRock’s attempt to persuade the regulator to consider an alternative approach.

Similarly, Bitwise, another significant player in the field, shifted towards a cash-only creation and redemption model on December 4. Initially, Bitwise had both in-kind and cash options in their documents, but the prevailing regulatory environment has influenced a change in strategy.

Delayed Decisions and Anticipated Approvals

The SEC recently delayed approving a spot Ether ETF for Invesco and Galaxy Digital. This postponement underscores the regulatory caution prevalent in the sector. Representatives from asset managers like BlackRock, Grayscale, and Fidelity have been actively engaging with the SEC to finalize details for their spot BTC products. Analysts anticipate batch approvals in early January, suggesting a potential wave of new ETF products.

The unfolding scenario presents a pivotal question: How will the SEC’s insistence on a cash redemption model shape the future of cryptocurrency ETFs? This question remains central as the industry navigates regulatory landscapes and seeks to innovate within these constraints.