In the race for Bitcoin spot ETF approval, major asset managers are adjusting their strategies to meet regulatory expectations. Recent amendments from firms like Valkyrie, Bitwise, and Invesco highlight a shift towards cash-only creation and redemption models—a structure reportedly preferred by the U.S. Securities and Exchange Commission (SEC).
This move, while potentially less efficient from a tax and operational perspective, may represent a pragmatic “approval first, optimization later” approach. Here’s what you need to know about the ongoing developments.
Why the SEC Prefers the Cash Creation Model
According to Bloomberg ETF analyst Eric Balchunas, the SEC's inclination toward the cash creation model is rooted in regulatory caution. In this setup, only the ETF issuer handles the actual Bitcoin, not intermediary broker-dealers. This limits exposure to unregistered entities and simplifies compliance.
In a cash-create model, an authorized participant provides cash to the ETF issuer, who then buys Bitcoin to back new shares. This contrasts with in-kind creation, where the participant provides Bitcoin directly. Both methods result in new ETF shares requiring new Bitcoin purchases.
This approach ensures that regulated entities manage cryptocurrency custody, aligning with the SEC’s investor protection mandate.
How Cash Creation Impacts Tax Efficiency and Existing Products
The in-kind model is traditionally favored for its tax efficiency. It allows shares to be created and redeemed without triggering immediate capital gains taxes. With cash creates, however, the fund must continually buy and sell Bitcoin, potentially generating taxable events.
This is particularly relevant for products like Grayscale’s Bitcoin Trust (GBTC). If forced to adopt a cash model, GBTC might need to sell large portions of its Bitcoin holdings—reportedly around 620,000 BTC with an average cost basis of $11,625—to meet redemption requests, creating market pressure.
Key Applicants Switching to Cash-Only Models
Recent amendments reveal a trend toward compliance:
- Valkyrie, Bitwise, and Invesco have each updated their S-1 filings to specify cash-only creation and redemption.
- Each has also expressed intent to switch to in-kind transactions in the future, should regulators allow it.
This suggests a strategic compromise: accept the less ideal structure initially to secure approval, then advocate for better terms later.
The Strategic Outlook: Approval Now, Improvement Later
While the cash model introduces tax inefficiencies and operational hurdles, many analysts and issuers agree that having an approved Bitcoin ETF—even under suboptimal conditions—is better than having none at all.
The expectation is that once the first wave of ETFs is launched, the industry can work with regulators to enable in-kind mechanisms, improving long-term efficiency and attractiveness.
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Frequently Asked Questions
What is the difference between cash and in-kind ETF creation?
In cash creation, authorized participants give cash to the ETF issuer, who buys the underlying asset. In in-kind creation, they provide the asset directly. In-kind is generally more tax-efficient.
Why does the SEC prefer the cash model for Bitcoin ETFs?
The SEC seems to prefer limiting Bitcoin handling to registered issuers rather than broker-dealers, reducing regulatory risk and simplifying oversight.
How would a cash model affect Grayscale’s GBTC?
GBTC could be forced to sell Bitcoin to meet redemptions, potentially realizing capital gains and affecting market liquidity.
Will Bitcoin ETFs eventually use in-kind creation?
Many applicants have stated their intent to switch to in-kind models in the future if permitted by regulators.
Is a cash-created Bitcoin ETF still a good investment?
It offers easier access to Bitcoin exposure for traditional investors, though it may come with higher tax burdens and costs compared to an in-kind structure.
Could these changes delay ETF approvals?
Most analysts believe these amendments align with SEC expectations and may actually accelerate approval timelines.
Investing in cryptocurrencies involves significant risk. Prices are highly volatile, and you may lose your entire investment. Always assess your risk tolerance and consult a financial advisor before investing.