SEC May Force Create Bitcoin ETFs With Cash: Why That Matters

According to Eric Balchunas, Bloomberg ETF analyst, it is guaranteed that regulators will force Bitcoin (BTC) ETF applicants to adopt a “cash-out” model before offering their much-anticipated investment products.

If the decision holds true, it will have major implications for the cost of managing each fund — and by extension, fees passed on to clients.

In kind VS cash

Since last month, BlackRock and other applicants have held several meetings with the Securities and Exchange Commission (SEC) about their “redemption model” — the process by which their ETF shares are held together with the fund's underlying BTC value.

Sponsors love it Blackrock They pushed an ‘in-kind' redemption model where a registered intermediary transfers Bitcoin (BTC) to the ETF issuer when new fund shares need to be issued to meet market demand.

In contrast, the SEC wants a cash-generating model, which requires intermediaries to send ETF issuers cash, which is then used to buy the BTC they need. The added measure prevents middleman broker-dealers from personally handling real BTC, which would not be for the regulator.

There is still value. Balchunas explained on Thursday Post to X:

“Cash creation is worse for tax bc money exchange is in and of itself simply a business, not an exchange of money. Therefore, cash-generating Bitcoin ETFs are not ideal and undermine one of the main advantages of the ETF structure.

Earlier capital gains tax

By self-executing the cash-to-BTC conversion, ETF issuers incur capital gains taxes whenever they want to sell their fund's BTC.

As a Bloomberg analyst shared James Seifert.This forces ETF holders to find out what they've got when they might not otherwise need it.

“Mutual funds are created with cash, which is how *all* mutual funds work,” he explained. “For most people, it should be more uncomfortable than anything else.”

The Greyscale Bitcoin Trust (GBTC) Such a change can be very damaging when converted to ETFs, as the currency has held clients' BTC for years at a significantly lower value than today.

Balchunas added that cash-based ETFs can be a “done deal” based on internal chat and various applicants' updated ETF documents.