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BlackRock among Bitcoin ETF hopefuls pushing back against SEC redemption requirements

BlackRock among Bitcoin ETF hopefuls pushing back against SEC redemption requirements
BlackRock is talking with the SEC about its proposed Bitcoin ETF and how the fund will handle redemptions. Credit: Rita Fortunato/DL News
  • The world’s largest asset manager met with the SEC recently to discuss its potential spot Bitcoin ETF.
  • BlackRock and Ark Invest favour “in-kind redemptions,” according to analysts, that would likely be more tax-efficient for investors.
  • The issue of redemptions appears to be a sticking point for the SEC.

As the wait for a spot Bitcoin exchange-traded fund rages on, asset managers have met with the US Securities and Exchange Commission to discuss the finer details of how such funds would operate.

BlackRock and Nasdaq, its chosen exchange partner, met with the SEC on Monday, according to a filing, to discuss redemptions — how the fund would handle investors exiting and redeeming the value of their shares.

Redemptions are a sticking point for approval right now with issuers pushing back on the SEC’s demand for cash redemption, Bloomberg Intelligence ETF analyst Eric Balchunas told DL News.

Cash redemption means investors’ shares would be sold by the fund company and then returned as cash, while BlackRock and Ark, another asset manager seeking approval of a spot Bitcoin ETF, are standing firm on in-kind redemption, which means market makers would receive Bitcoin in return that would later be sold for cash.

In-kind redemptions would officially involve transferring the Bitcoin from the ETF to the investor in exchange for their ETF shares. The process would be carried out by authorised market participants such as market makers — which BlackRock noted in its presentation to the SEC.

This process would likely be more tax efficient, since the fund wouldn’t have to sell securities to meet redemptions, which could trigger capital gains taxes.

This is the “cleanest structure” for issuers and investors, Bloomberg Intelligence ETF analyst James Seyffart said on X, formerly Twitter.

Typically these types of redemptions are used when it’s less efficient to exchange the underlying assets.

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‘Latest subplot’

“Cash creates makes sense” from the SEC’s point of view Balchunas said on X last week. Broker dealers in the US “can’t deal in Bitcoin so doing cash creates puts onus on issuers to transact in Bitcoin and keeps broker dealers from having to use unregistered subsidiaries or third party firms to deal with the Bitcoin,” he said.

“Less limitations for them overall,” he added.

Issuers like BlackRock, Ark Invest, and Grayscale are all pushing to have in-kind redemptions. Balchunas called the debate the latest “sub-plot in this never ending drama,” on X.

Only two or three issuers planned cash redemptions while the rest favour in-kind. Regardless, the Bloomberg Intelligence analysts maintain the odds of a spot Bitcoin approval by January 10, 2024 are 90% and that it’s a “good sign” the process is marching on and the SEC has a “path forward in the plumbing that they are comfortable with.”

Adam Morgan McCarthy is DL News’ London-based Markets Correspondent. Got a tip? Reach out at adam@dlnews.com.