The United States Securities and Exchange Commission (SEC) has recently introduced a new regulatory standard for all Bitcoin Spot Exchange-Traded Fund (ETF) applicants. This development came as spot Bitcoin ETF issuers were finalizing their filings with the regulatory body. The SEC’s latest requirement, known as the “Cash Redemption Model,” has raised eyebrows and garnered attention from industry analysts and experts.
Under the new model, every Bitcoin Spot ETF applicant will have to adhere to the SEC’s Cash Redemption Model. This model allows authorized participants to deposit funds in the ETF equal to the net asset value of the creation units. These funds are then used to purchase the underlying asset, Bitcoin, on behalf of the fund. While this approach seems straightforward, it deviates from other models proposed by different issuers. The SEC’s unwavering demand for this particular model showcases their commitment to regulating the Bitcoin ETF market.
Financial lawyer Scott Johnsson revealed that Invesco, a prominent investment management company, is the most recent firm to adopt the cash creation and redemption standard for its ETF. According to Johnsson, creation and redemption transactions for Invesco’s ETF will initially be made in cash. However, the trust may eventually allow or require such transactions to be carried out using the “in-kind” model. Several ETF applicants have suggested the in-kind model, where participants deposit a collection of weighted securities that align with the ETF’s portfolio. The adoption of the cash model by Invesco demonstrates their commitment to meeting the SEC’s requirements.
In response to the growing challenges faced by financial firms when holding cryptocurrencies, Blackrock has made adjustments to its Spot Bitcoin ETF application. The company has introduced an in-kind redemption model called “Prepay,” which aims to facilitate Wall Street Banks’ participation in the fund. With this modification, authorized participants can issue new fund shares using cash instead of just Bitcoin. The funds used in this process can then be converted into Bitcoin through an intermediary and stored by the ETF’s custody provider. By enabling banks unable to store cryptocurrencies directly to participate, Blackrock aims to address one of the major reasons behind the SEC’s rejection of previous ETF applications.
Both the Cash Redemption Model and the Prepay Model offer unique advantages. The Cash Redemption Model ensures that funds deposited in the ETF are used to directly purchase Bitcoin, eliminating the need for participants to sell securities for instant cash. This model streamlines the creation and redemption process, making it more efficient. On the other hand, the Prepay Model allows authorized participants to issue new fund shares using cash, providing greater accessibility to banks that cannot store cryptocurrencies themselves. This model also helps mitigate concerns of market manipulation, a key factor in the SEC’s previous rejection of Bitcoin ETF applications.
The SEC’s implementation of a new regulatory standard for Bitcoin Spot ETF applicants has sparked discussions and debates within the cryptocurrency industry. The requirement for a Cash Redemption Model has prompted issuers and applicants to adjust their filings accordingly. Invesco and Blackrock are among the firms that have embraced these new models, demonstrating their commitment to meeting the SEC’s demands. As the cryptocurrency market continues to evolve, it remains to be seen how these new standards will shape the future of Bitcoin ETFs. Investors and market participants should conduct their own research and exercise caution when considering investments in this space.
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