Blackrock held a meeting with the U.S. Securities and Exchange Commission (SEC) on Monday to discuss the structure of its upcoming Bitcoin ETF, according to a memo from the regulator.
The meeting’s attendees included 8 members from the SEC’s Division of Trading and Markets, 7 representatives from BlackRock, and 4 representatives from the NASDAQ Stock Market.
“The discussion concerned The NASDAQ Stock Market LLC’s proposed rule change to list and trade shares of the iShares Bitcoin Trust,” read the notice.
Though no explicit transcript or summary of the meeting was provided, the memo included a short slide presentation from BlackRock breaking down potential “redemption models” – the process by which shares in the iShares Bitcoin Trust (IBTC) are created and destroyed.
The slides broke down two methods for this, including the “in-kind” and “in-cash” redemption models. Both are meant to return the value of the ETF’s shares to the net asset value of its underlying bitcoin during price dislocation periods.
Under an in-kind model, a market maker buys ETF shares from the relevant listing exchange and transfers them back to the ETF issuer. The issuer’s Bitcoin custodian then releases BTC back to another market maker, who is free to sell that BTC on the open market if they choose.
An in-cash model follows roughly the same process but requires the ETF issuer to sell their BTC to a market maker first before redeeming the shares for cash.
Which ETF Model is Better?
The SEC has already held discussions with other aspiring ETF sponsors this week, such as Grayscale, which recently formed an agreement with the Bank of New York Melon for the latter to act as a transfer agency for the trust’s shares.
According to Bloomberg ETF analyst Eric Balchunas, cash redemptions may be easier for ETF issuers to handle since it doesn’t require them to directly interact with Bitcoin. An in-kind redemption, by contrast, is more tax-efficient.
Hearing chatter SEC’s Trading & Markets engaged w/ exchanges this week on spot bitcoin ETF 19b-4s, is advising them they’d like the ETFs to do cash creates (vs in-kind), and has asked them to get in amendments in next couple wks. This isn’t unexpected but good sign nonetheless.
— Eric Balchunas (@EricBalchunas) November 17, 2023
“Only 2-3 filers had planned cash creates, the rest wanted to do in-kind,” he said, noting that in-kind applicants may risk delayed approvals from the SEC if it continues favoring a cash redemption model.
The SEC’s final deadline to approve or deny the first spot Bitcoin ETF from Ark/21Shares is on January 10. Balchunas maintains that the ETF has a 90% chance of receiving approval.
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