As the SEC engages in detailed discussions with investment giants like BlackRock and Fidelity, the potential approval of a spot Bitcoin ETF seems to be moving closer to reality.
The crypto market is abuzz following recent revelation that the Securities and Exchange Commission (SEC) engaged in discussions with major investment firms BlackRock Inc (NYSE: BLK) and Fidelity Investments, to iron out technical details for a potential spot Bitcoin Exchange-Traded Fund (ETF).
Spot Bitcoin ETF and the Redemption Process
Vivian Fang, a finance professor at Indiana University, noted that the SEC appears to be in an inspection period, working closely with investment firms to iron out the details for a potential spot Bitcoin ETF. Key among these details is the redemption process, a critical component that will shape the structure of the ETF.
Notably, BlackRock presented its iShares Bitcoin Trust to the SEC on November 28, accompanied by a plan for a “Revised In-Kind” model. This model aims to provide more flexibility to the asset manager, especially concerning the redemption process. In essence, it would allow investors to redeem their shares for Bitcoin, and BlackRock could then turn it into cash via a broker-dealer.
Fang compares the potential structures of a spot Bitcoin ETF to a basket of eggs, highlighting the importance of determining which entity would liquidate Bitcoin in case of redemption.
According to Fang, the SEC appears to favor a “cash model”, wherein BlackRock would be required to move the Bitcoin out of storage, sell it immediately, and then provide the resulting cash to the investor. In contrast, asset managers seem to lean towards an “in-kind redemption” model, where investors receive their share of Bitcoin upon redemption.
According to memos from Fidelity’s recent meeting with the SEC, the firm seems to be inclined towards an in-kind redemption model. Meanwhile, Fidelity Investments has also achieved a remarkable milestone with its spot Bitcoin ETF, with the ticker “FBTC”, making its appearance on the active and pre-launch list of the Depository Trust & Clearing Corporation (DTCC).
Risk Management and Investor Protection Regarding Bitcoin ETF
The choice between these models ultimately boils down to the level of risk that BlackRock, Fidelity, or any other issuer is willing to assume. Fang explained the analogy using the aforementioned basket of eggs model, highlighting that asset managers prefer models with minimal risk, ensuring investors can redeem their assets without facing conversion uncertainties.
BlackRock’s revised in-kind model seeks to address this concern by allowing the asset manager greater control over the liquidation process, minimizing the impact of large redemptions, and providing tax benefits.
As the SEC engages in detailed discussions with investment giants like BlackRock and Fidelity, the potential approval of a spot Bitcoin ETF seems to be moving closer to reality. However, it is worth mentioning that the SEC has not explicitly stated that it will undoubtedly approve the spot Bitcoin ETF products.
The debate surrounding the technical details, redemption models, and risk management reflects the intricate balance between investor protection and the flexibility sought by asset managers. The outcome of these discussions could greatly impact future crypto investments within the traditional financial sector.
