ETF finalized: Dozens of meetings with SEC in exchange for the last two conditions before approval

“Confirm AP Agreement” plus “Cash Creation” may equal “Approved”.

Written by: jk, Odaily Planet Daily

On December 21, local time in the United States, Fox Business reporters reported that the SEC put forward new conditions for the approval of spot Bitcoin ETFs during a meeting with ETF applicants, which requires the ETF to use cash to create and remove all physical redemptions. hint. Since then, several applicants, including BlackRock, have submitted revised S-1 documents.

On December 23, Bloomberg ETF analyst Eric Balchunas posted on the ) information will be confirmed in the next S-1 filing update (in the next 10 days). He believes that this step will not be easy and may be too time-consuming, which may prevent some issuers from receiving approval at the same time in early January. But “Confirm AP Agreement” plus “Cash Creation” may equal “Approval”.

At the same time, Fox Business and Bloomberg analysts respectively confirmed that the SEC has required spot ETF issuers to submit revised documents before the end of next week (December 31, U.S. time). Many people speculated that this may be for around January 10. Prepare for approval.

Previously, according to sources, as of the 20th, the SEC had held 24 meetings with various ETF applicants, and had held new meetings with BlackRock, Valkyrie and Grayscale before this Saturday. This also means that these two new conditions were discussed at multiple meetings. The last two conditions, which are expected to be approved on January 10, can be said to be final.

So what do these two conditions mean? Is it difficult to achieve? Will the ETF be approved on January 10th as expected? Let’s take a look at the fine print of the conditions.

Cash Creation vs. In-kind Creation (Cash Creation vs. In-kind Creation)

The creation of ETF is the process of selling new ETF shares to investors on behalf of the issuer. It is mainly divided into two methods: cash creation and physical creation. In cash creation, large institutional investors or Authorized Participants provide cash to the ETF, and the ETF management company uses these funds to purchase the assets that make up the index tracked by the ETF (that is, Bitcoin) and issue ETF shares of corresponding value. to investors. This method is simple, flexible and easy to understand, and is suitable when the assets of the ETF are difficult to obtain directly. However, Bitcoin does not appear to be difficult to acquire.

In contrast, physical creation involves investors directly providing the stocks or other assets that make up the index the ETF tracks, rather than cash. These assets are exchanged directly for equivalent ETF shares, thereby reducing transaction costs. In the case of Bitcoin ETFs, physical creation represents investors using Bitcoin to directly purchase shares of the spot Bitcoin ETF. Both creation methods aim to flexibly adjust the number of ETF shares based on market demand to ensure that their price is consistent with the actual value of the tracking index or asset portfolio.

Readers who see this must have a doubt, if I already own Bitcoin, why do I need to use Bitcoin to purchase ETFs that use Bitcoin as an investment asset? Isn’t this a thing? There are two reasons here.

The first reason doesn’t have much to do with Bitcoin: ETF issuers are often willing to offer the option of physical creation because of the tax exemption. For example, when purchasing an ETF consisting of stocks A, B, and C, if I am a holder of A stock, then directly exchanging A stock for ETF shares is equivalent to owning stocks of three companies at the same time. , diversify investments and reduce risks, and because no securities are sold, no tax is required under U.S. tax law. If I choose cash creation, then I need to sell A shares first, and this will involve capital gains tax. Therefore, ETF issuers generally provide both cash and physical options in purchase options, but here the SEC only wants Bitcoin ETF issuers to use cash as the only creation method.

The second reason has a lot to do with Bitcoin: For high-capital investment institutions pursuing safety, direct investment in digital currencies does not sound like a safe choice, especially after several thunderstorms last year. after. From a credibility perspective, “We have invested in a very safe digital currency” is obviously more convincing to asset management LPs than “We have invested in a financial investment ETF provided by BlackRock.” This is why ETFs are more attractive to institutional investors than Bitcoin itself.

Since the process is the purchase of ETF shares, some news reports also call it cash subscription. Correspondingly, Cash Redemption and In-kind Redemption represent the payment methods accepted by investors who own ETF shares when selling these shares.

Odaily previously reported that in another meeting between Grayscale and the SEC to discuss matters regarding GBTC, Grayscale still insisted on pursuing physical means (subscription and redemption). Bloomberg analyst James Seyffart also said, “I am almost entirely on the side of Grayscale, BlackRock and other issuers that have or are promoting physical means. This is a simpler and more efficient way to run ETFs.”

Authorized Participants

Authorized participants of an ETF are those large institutional investors, such as investment banks or brokerage firms, who are authorized by a specific ETF to trade directly with the ETF. For example, institutions such as Morgan Stanley and Goldman Sachs, as APs, can directly create cash with ETF management companies, that is, provide cash in exchange for newly issued ETF shares.

According to analysts, the SEC hopes to have issuers confirm the AP list and list it in an updated filing within the next 10 days. This timeframe may not be feasible for some issuers and they may not be able to catch up with potential approvals in early January.

However, Bloomberg ETF analyst Eric Balchunas also mentioned that AP agreement + cash creation = approval. In other words, these two steps should be the last steps before approval. Odaily will continue to track the updated documents submitted before the 31st of the report.