BlackRock’s latest proposal: The difference between the SEC’s preferred cash redemption model of Bitcoin spot ETF and the physical redemption model

Written by Aiying

BlackRock, ARK Invest and WisdomTree submitted a revised Bitcoin spot ETF proposal yesterday, adopting the Cash Creation Method, which is the preferred redemption method of the U.S. Securities and Exchange Commission (SEC). This change marks an important shift in the industry and may indicate that discussions on physical redemption options will be postponed. This is also a strategic move to simplify operational procedures before the Christmas holiday. Whether it is a physical redemption model or a cash redemption model, Bitcoin spot ETFs hold Bitcoin as their underlying assets. The main difference lies in the redemption process. The SEC prefers the cash redemption model because only the issuer will handle Bitcoin, avoiding the situation where unregistered broker subsidiaries handle Bitcoin.

However, the cash redemption model involves real cash flow in Bitcoin ETFs, which may trigger tax liabilities, such as capital gains tax, because it is regarded as actual buying and selling activities. The physical redemption model directly exchanges Bitcoin for ETF shares, which does not involve the inflow and outflow of cash, so it is simpler in tax treatment and may avoid the tax burden caused by cash transactions. Let's talk about these two redemption models:

In-kind redemption model

• Market Makers (MM): Liquidity providers in the market. They are either registered US securities brokers/dealers, regulated by securities exchanges, or unregistered entities with no registration regulator.

• Authorized Participant (AP): A financial institution that is authorized to create and redeem shares of an ETF, typically in large numbers of “creation units.”

• Listingexchange：A platform for trading ETF shares.

• ETF Issuer: The company that manages the ETF.

• Transfer Agent: A third party that handles the transfer of ETF shares.

• Bitcoin custodian (e.g. Coinbase): The entity that holds custody of the ETF’s Bitcoin assets.

• Spot goodscryptocurrency交易所：即时交付比特币交易的地方。

The process of trading day (T day):

Market makers request redemptions of ETF shares from authorized participants, especially when the price of an ETF deviates from its net asset value (NAV). After approval by the ETF issuer, market makers obtain shares for redemption.

On the next business day (T+1), they surrender those shares and the Bitcoin custodian releases the Bitcoin to them, which can be sold on the spot market. This model helps keep the ETF price consistent with the market value of Bitcoin.

Cash redemption model

• Redemption Order Submission: Whether registered or not, a market maker submits an order to an Authorized Participant to redeem ETF units at a price below the net asset value for the purpose of arbitrage.

• Order Approval: The ETF issuer approves the redemption request.

• 购买 ETF 份额：市场做市商通过上市交易所购买份额。

• Cash movement instructions: The ETF issuer instructs the Bitcoin custodian to prepare cash from cold reserves for sale.

• Trading with ETF issuers: Issuers trade Bitcoin for U.S. dollars directly with market makers.

• Cash Delivery to Transfer Agent: The market maker delivers cash to the transfer agent.

• Bitcoin delivery: The custodian gives the Bitcoin to the market maker, who may sell it for an arbitrage profit.

• Unit delivery and cash release (next day): Market makers hand over units to transfer agents and issuers release cash to them, completing the process.

This time, the U.S. Securities and Exchange Commission (SEC) is more inclined toXiaobai Navigation向于现金赎回模式的原因可能还包括以下几点：首先，现金赎回模式在操作上更为简便，使得监管过程更加直接和透明，便于监管机构进行有效监控和审计。其次，这种模式可以降低因大规模赎回或购买活动直接影响比特币市场价格的风险，从而减少市场操纵的可能性。此外，现金赎回模式有助于更好地管理流动性风险，尤其是在市场波动性较大时，能够提供更大的灵活性和稳定性。最后，SEC 考虑到保护投资者的利益，认为现金赎回模式能够更有效地保护投资者免受底层资产价格波动的直接影响，特别是在高波动性的加密货币市场中。

The article comes from the Internet:BlackRock’s latest proposal: The difference between the SEC’s preferred cash redemption model of Bitcoin spot ETF and the physical redemption model

Related recommendations: Rebirth from the ashes, the evolution of PrimeVote of Huobi HTX

"Global expansion, ecological prosperity, wealth effect,Safety"Compliance" is a summary of the current situation and future of Huobi HTX. Huobi HTX, one of the oldest exchanges in the crypto industry, has been up and down for ten years and is now fully focused on how to achieve a second spring. The answer is also very simple, that is, to return to the original intention of the crypto industry, so that everyone and every ordinary retail investor can regain control of the wealth radiation of crypto assets and get rid of the giant whales,…