BlackRock, the world’s largest asset manager, has recently updated its application for a spot Bitcoin Exchange-Traded Fund (ETF) in a bid to address the U.S. Securities and Exchange Commission’s (SEC) concerns.
The revisions, detailed in the meeting minutes from a Nov. 28, 2023, discussion with the SEC’s Division of Trading and Markets, focus on mitigating issues related to market manipulation and broker-dealer registrations.
BlackRock’s updated redemption model
In its revised proposal, BlackRock introduces a “prepaid model” within the existing in-kind redemption framework. This model requires the offshore market maker to prepay cash to the registered broker-dealer entity before the delivery of ETF shares in the redemption process.
This adjustment is designed to reduce the financial risks for the broker-dealer by separating it from the complexities of transferring Bitcoin to the market maker.
BlackRock maintains that the in-kind structure, even with these modifications, offers several advantages over a cash redemption method. These include lower transaction costs, streamlined operations, and a reduced risk of manipulation.
The asset manager contends that resolving issues with the balance sheet and broker-dealer registrations by modifying the timing and custody transfer processes could facilitate the Bitcoin ETF application’s compliance with regulatory standards and simultaneously improve incentives for shareholders.
Whether the updates provide sufficient guardrails to offset SEC unease regarding spot Bitcoin exposure for retail investors through an ETF remains unclear.
Race for regulatory green light
The move to establish a spot Bitcoin ETF has gained traction recently, with financial giants like BlackRock and Fidelity Investments submitting applications to the SEC.
However, the path to approval is fraught with challenges. The SEC has historically been hesitant to approve spot Bitcoin ETFs, citing worries over market manipulation and insufficient surveillance measures.
Recent feedback from the SEC on the latest applications has reiterated these concerns, particularly the lack of clarity on specific spot exchanges for surveillance-sharing agreements.
On Nov. 17, rumors circulated on social media that suggested the SEC might have directed applicants to adopt cash-creation methods rather than transferring Bitcoin in-kind.
This unconfirmed shift could significantly change the responsibilities of issuers, requiring them to manage Bitcoin transactions more discreetly. If true, this new approach could enable broker-dealers to sidestep direct involvement in crypto transactions that fall beyond existing regulatory frameworks.
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