KEY POINTS
- The SEC prefers the cash creation and redemption model
- BlackRock and ARK have caved in to SEC's instruction
- ETF analysts says the in-kind model benefits investors the most
The U.S. Securities and Exchange Commission is reportedly concerned that spot Bitcoin exchange-traded funds (ETF) using in-kind creation and redemption model would be used for money laundering.
The major Wall Street regulator has reportedly instructed spot Bitcoin ETF applicants to amend their filings and use the cash creation and redemption model.
After several attempts to push for an in-kind creation and redemption model, spot Bitcoin ETF aspirants like BlackRock and ARK caved in to the SEC's instruction and amended their applications earlier this week.
But why is the SEC so insistent on the cash creation model when the in-kind model would benefit investors the most?
According to Fox Business Network's Charles Gasparino, the regulator is concerned about money-laundering through in-kind creation and redemption model.
"Update on BTC Spot ETF: Firms believe @SECGov will rule after Jan 8; they feel confident the SEC will approve but with a twist; unlike normal ETF's you can only purchase shares with cash; SEC worried about ETF's being used as a vehicle for money laundering," Gasparino tweeted.
Bloomberg Intelligence senior ETF analyst Eric Balchunas found the information "interesting."
"SEC worried about money laundering via in-kind creations in a spot bitcoin ETF, this is why they so dug in on cash creates only (which is a much more closed system). Rest of the info here we already knew," Balchunas said on X.
Interesting detail: SEC worried about money laundering via in-kind creations in a spot bitcoin ETF, this is why they so dug in on cash creates only (which is a much more closed system). Rest of the info here we already knew.. https://t.co/3qpXEaN6vM
— Eric Balchunas (@EricBalchunas) December 20, 2023
Balchunas previously said the SEC wants cash creates on spot Bitcoin ETF in the U.S. probably because, in that model, issuers are the only ones handling Bitcoin and not the registered broker-dealers or intermediaries.
"The reason the SEC wants cash creates only is this means only the ETF issuer handles btc and not the intermediaries (registered broker dealers can't). They prob also not comfy w [sic] them having unregistered broker-dealer subsidiaries handle either (bc they not registered)," Balchunas said in a tweet.
Moreover, the ETF analyst explained that the cash creation and redemption model is worse for taxes because here, cash changes hands.
When there is excess demand for a bitcoin ETF an intermediary ("the AP") will need to create new ETF shares. With cash creates they give ETF issuer cash for new shares (issuer then buys btc) vs in-kind they give issuer btc for shares. Either way new ETF shares=new btc purchase. https://t.co/C7jKdTIzEb
— Eric Balchunas (@EricBalchunas) December 14, 2023
Citing another Bloomberg ETF analyst James Seyffart, he wrote, "A superpower of the ETF structure is the tax efficiency derived from in-kind creations and redemptions, where underlying assets are exchanged directly for shares of the ETF [in] a non-taxable event."
