After "pulling" with the SEC dozens of times, BitcoinSpot ETF in exchange for the last two conditions before approval

Author: 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 SpotBitcoin ETFs in a meeting with ETF applicants, that is, the ETF needs to use cash to create and remove all in-kind redemption hints. Since then, several applicants, including BlackRock, have filed amended S-1 documents.

On December 23, Bloomberg ETF analyst Eric Balchunas posted on the X platform that the latest Snapshot of ETF Cointucky Derby added a “AP protocol” column because the SEC expects the applicant to confirm the AP (Authorized Participant, i.e., underwriter) information in the next S-1 update (next 10 days). He believes that this step will not be easy and may be too time-consuming, and may prevent some issuers from being approved at the same time in early January. However, “Confirm AP Agreement” plus “Cash Creation” may be the same as “Approved”.

Meanwhile, Fox Business and Bloomberg analysts separately confirmed that the SEC has asked spot ETF issuers to submit revised filings by the end of next week (December 31, US time), with many speculating that this may be in preparation for approval around January 10.

Previously, according to the source, as of the 20th, the SEC has reached 24 meetings with various ETF applicants, and new meetings with BlackRock, Valkyrie and Grayscale were held before Saturday this year. This also means that the two new conditions have been discussed through a number of meetings. The last two conditions of the estimated approval time point of January 10 can be said to be a kick in the door.

So what do these two conditions mean? Are they difficult to achieve? Will the ETF be approved on January 10 as expected? Let’s take a look at the details of the conditions.

Cash Creation vs. In-kind Creation

ETF creation is the process of selling new ETF shares to investors on behalf of the issuer, and there are two main ways: 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 the funds to purchase the assets (i.e., Bitcoin) that make up the index tracked by the ETF and issue ETF shares of corresponding value to investors. This approach is simple, flexible, and easy to understand, and is suitable when the assets of the ETF are difficult to access directly. However, Bitcoin does not seem to be difficult to obtain.

In contrast, physical creation involves investors directly offering the stocks or other assets that make up the index tracked by an ETF, rather than cash. These assets are directly exchanged for ETF shares of equivalent value, reducing transaction costs. In Bitcoin ETFs, physical creation represents the direct purchase of shares of SpotBitcoin ETF using Bitcoin. Both are created to flexibly adjust the number of ETF shares based on market demand, ensuring that their price is consistent with the actual value of the tracking index or portfolio of assets.

The reader must have a question, if I already own Bitcoin, why do I need to use Bitcoin to buy an ETF with 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 usually willing to offer the option of physical creation because it’s tax-free. For example, when buying an ETF consisting of three stocks, A, B, and C, if I am the holder of A shares, then exchanging A shares directly for ETF shares is equivalent to owning shares of three companies at the same time, diversifying the investment and dropping risk, and since I do not sell the securities, I do not need to pay taxes under US tax law. If I choose cash creation, then I need to sell A shares first, which involves Capital Gains Tax. As a result, ETF issuers generally provide cash and physical options in the purchase option, but here the SEC only allows Bitcoin ETF issuers to use cash as the only way to create.

The second reason has a lot to do with Bitcoin: for high-volume investment institutions, investing directly in Digital Money does not sound like a safe choice, especially after several thunderstorms last year. From a credible point of view, “we invested in a very safe Digital Money” is obviously better to convince asset managers than “we invested in a financial investment ETF provided by BlackRock”. That’s why ETFs are more attractive to institutional investors than Bitcoin itself.

Since the process is a purchase of ETF shares, some news reports also refer to it as a cash subscription. Conversely, cash redemptions and in-kind redemptions represent the payment methods that investors who own shares of ETFs accept when selling those shares.

Odaily previously reported that in the re-meeting between Grayscale and the SEC, when discussing matters about GBTC, Grayscale still insisted on fighting for in-kind (subscription and redemption). Bloomberg analyst James Seyffart also said, "I’m almost entirely on the side of Grayscale, BlackRock, and other issuers who have been or are pushing for physical means. It’s an easier 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 particular ETF to trade directly with the ETF. For example, institutions such as Morgan Stanley and Goldman Sachs, as APs, can engage in cash creation directly with ETF management companies, i.e., provide cash in exchange for newly issued ETF shares.

According to analysts, the SEC expects to have the issuer confirm the AP list and list it in an updated filing within the next 10 days. This timeline may not be complete for some issuers, who may not be able to make it in time for a potential approval in early January.

However, Bloomberg ETF analyst Eric Balchunas also mentioned that AP Protocol + Cash Creation = Approval. In other words, these two steps should be the last steps before approval. Odaily will keep track of updates submitted before the 31st.