SEC Reviews BlackRock’s Bitcoin ETF In-Kind Redemption Proposal #NewsETFs

Tldr:

• BlackRock has proposed allowing in-kind redemptions for its Bitcoin ETF, which would let authorized participants receive actual Bitcoin instead of cash when redeeming shares – SEC is now reviewing this proposal
• The SEC has given a 21-day public comment period after the proposal is published in the Federal Register before making a decision
• This change would only affect authorized participants (large financial institutions), not retail investors
• Currently, Bitcoin ETFs use a cash redemption model where Bitcoin must be sold for cash when shares are redeemed
• In-kind redemptions could reduce transaction costs and help avoid forced Bitcoin sales that might impact prices

The Securities and Exchange Commission (SEC) is reviewing a proposal from BlackRock that could change how its Bitcoin exchange-traded fund (ETF) handles redemptions.

The proposal, submitted through Nasdaq, would allow for in-kind redemptions of the iShares Bitcoin Trust, moving away from the current cash-only model.

Under the existing system, when investors want to redeem their ETF shares, BlackRock must sell the underlying Bitcoin and provide cash in return. The new proposal would allow authorized participants – typically large financial institutions – to receive actual Bitcoin instead of cash when redeeming shares.

The SEC has opened a 21-day public comment period that will begin once the proposal is published in the Federal Register. After this period, the agency can choose to approve, disapprove, or start additional proceedings to examine the proposal further.

James Seyffart, a Bloomberg Intelligence ETF analyst, clarified that these changes would only affect authorized participants, not individual investors. This distinction is important because it means retail investors would continue to trade ETF shares on the open market as they do now.

The proposal represents a shift from the discussions that took place over a year ago when the SEC was first considering whether to approve spot Bitcoin ETFs. During that time, the SEC preferred a cash model that required ETF providers to convert Bitcoin to cash during the redemption process.

In January 2024, the SEC approved several spot Bitcoin ETFs, including BlackRock’s proposal, all operating under the cash redemption model. This approval came after years of rejected applications and marked a turning point for cryptocurrency investment products.

BlackRock’s latest proposal aims to make its Bitcoin ETF operate more like traditional commodity ETFs, such as those tracking gold. In-kind redemptions are common in the broader ETF market and are often seen as an efficient way to handle the creation and redemption process.

Potential Benefits

The potential benefits of in-kind redemptions include reduced transaction costs and improved market liquidity. When authorized participants can receive Bitcoin directly, it eliminates the need to sell the cryptocurrency on the open market during redemptions.

This change could also help prevent forced Bitcoin sales that might put downward pressure on prices. Under the current cash redemption model, large redemption requests require the sale of Bitcoin, which can impact market prices.

The SEC’s willingness to consider this change suggests an evolution in its approach to cryptocurrency investment products. Initially, the agency favored the cash model due to concerns about market manipulation and volatility.

The timing of this proposal follows other developments in the cryptocurrency investment landscape. In August 2023, Grayscale Investments won a lawsuit against the SEC, which challenged the regulator’s rejection of Grayscale’s attempt to convert its Bitcoin Trust into a spot ETF.

ETF Applications

Meanwhile, other exchanges and firms are continuing to pursue innovations in the cryptocurrency ETF space. The CBOE BZX Exchange has filed applications for XRP ETFs on behalf of several investment firms, including Bitwise, Canary Capital, 21Shares, and WisdomTree.

BlackRock’s proposal comes as the firm expands its Bitcoin ETF presence globally, having recently extended its offerings to Europe. This international expansion demonstrates the growing institutional interest in cryptocurrency investment products.

The SEC’s decision on this proposal could influence how other Bitcoin ETF providers structure their products. If approved, it might lead to similar proposals from other ETF issuers seeking to offer in-kind redemptions.

The 21-day comment period will give market participants and the public an opportunity to provide feedback on the proposed changes. The SEC will review these comments as part of its decision-making process.