Bitcoin ETF issuers are turning to cash creation, redemptions.
The Bitcoin ETF race is heating up, and at least a dozen issuers are vying for spot-based product approval. However, challenges have arisen in fund share creation and redemption mechanisms as regulators prefer one method and issuers prefer another.
On December 14, Bloomberg reported that this Bitcoin ETF ‘redemption debate' will pose further challenges. Wonky plumbing mechanics are in the oil as exporters and US regulators hammer out the final specifications.
Bitcoin ETF Mechanics
The SEC has publicly stated its refusal to allow broker-dealers to hold bitcoins. This makes it impossible for the regulator to approve Bitcoin ETFs through the commonly known “in-kind” redemption method.
There are two ETF share creations and redemptions: cash creation and in-kind.
Redemptions in kind allow the ETF issuer to change the fund's underlying assets. In this case, the main asset is Bitcoin with a market maker, rather than trading in cash when you create and buy stocks.
This allows the ETF to issue creation units to participants without immediately selling the securities for cash. It also avoids taxable events and is popular with issuers.
Cash redemptions require the fund manager to sell bitcoins to distribute the funds to redeeming shareholders. However, this creates taxable transactions.
Read more: How to prepare for a Bitcoin ETF: A step-by-step approach
Cash creation is when participants put money into an ETF equal to the net asset value of the creation units. This method gives participants more flexibility and is favored by the SEC.
Moreover, the SEC's focus on redemption models in its recent meeting with Bitcoin ETF issuers suggests the need for approval on cash creations and redemptions.
Additionally, cash redemptions may result in tax bills for investors if the fund must sell Bitcoin to meet redemptions. This also results in the typical ETF tax inefficiency.
Bloomberg announced
“When the issuer has to raise funds by selling bitcoins, this may result in a capital gain distribution to the remaining holders.”
Givers pull the line
Several Bitcoin ETF applicants have already agreed to cash creations and redemptions.
Invesco, Galaxy, Valkyrie, and BitWise recently updated their SEC filings to be financial innovations. However, BlackRock has submitted a sort of “enhanced” model to the SEC.
On Dec. 14, senior ETF analyst James Seifert commented on recent questions about the two methods and their tax implications.
“It should be more of a convenience for most people than anything else,” he said before adding.
“So, while I'm not saying it's pointless – it's not as hurtful or horrible as some people are saying on Twitter.”
Disclaimer
Adhering to the Trust Project guidelines, BeInCrypto is committed to unbiased, transparent reporting. This newsletter aims to provide accurate and up-to-date information. However, readers are advised to independently verify facts and consult with experts before making any decisions based on this content.
