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 goodscryptocurrencyexchange: Where Bitcoin transactions are delivered instantly.

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 NavigationThe reasons for preferring a cash redemption model may also include the following: First, the cash redemption model is simpler in operation, making the regulatory process more direct and transparent, and facilitating effective monitoring and auditing by regulators. Second, this model can reduce the risk of large-scale redemption or purchase activities directly affecting the Bitcoin market price, thereby reducing the possibility of market manipulation. In addition, the cash redemption model helps to better manage liquidity risks, especially when the market is volatile, and can provide greater flexibility and stability. Finally, the SEC, considering the interests of investors, believes that the cash redemption model can more effectively protect investors from the direct impact of underlying asset price fluctuations, especially in high volatility.cryptocurrencyIn the market.

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

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