With the clock ticking down to the January deadline for the Securities and Exchange Commission to approve, deny or delay its decision on Bitcoin ETFs, there is one final hurdle for issuers: authorized participants.
Bloomberg Intelligence analyst Eric Balchunas predicts that every Bitcoin ETF prospect will need to file an S-1 before they count on approval.
“This last step is not easy, and may deter some. [the] Gateway,” Balchunas said on Twitter on Friday. He went on to hypothesize that “AP deals + creates money = approval.”
The authorized participant wrinkle appears to be another attempt by the SEC to clearly define who can and cannot participate in the creation and redemption of Bitcoin ETF shares, and by extension, directly handle BTC.
By definition, an authorized participant is an organization – other than the issuer – authorized to create and redeem ETF shares. Typically, large banks and financial institutions take that role.
And generally speaking, the more authorized participants there are for an ETF, the more liquidity there is. When there is a shortage of stock in the market, authorized participants can create more. And when more ETF shares are on the market, authorized participants can reduce the number of shares available. In both cases, additional participants help the ETF's share price move in line with its underlying asset — in this case, that's Bitcoin.
The Spot Bitcoin ETF is a product that the industry has wanted to allow for US investors for over a decade. But the SEC insisted that there are too many risks to allow investors to reach one. Chief among these risks are: market manipulation and reliable price discovery.
In the screenshot, Balchunas showed a table that tracks the status of Bitcoin ETF prospects. Of them, half still allows for the creation of shares in cash or in kind. But as the Bloomberg analyst himself said, creating a stake in kind is a non-starter for the SEC.
In a webinar earlier this week, he said, “The SEC was also kind of uncomfortable because it allowed registered brokers to use Bitcoin, and that's not allowed. “I don't think any unregistered branches want to touch Bitcoin. Creating cash solves that – it means that the issuer basically touches the Bitcoin and no one else.
The past two months have been marked by meetings and phone calls between regulators and enablers such as Greyscale, Valkyrie and BlackRock. At this point, many speculate that the SEC has done so much work if not for the purpose of getting applicants to finally approve at least some of their S-1 filings.
Currently, there are more than a dozen potential Bitcoin ETF applications pending with the US regulator. Although companies have been trying to gain acceptance since 2013, expectations rose in June when Wall Street behemoth BlackRock threw its hat into the ring with the iShares Bitcoin Trust.
BlackRock's S-1 filing has received three amendments since its filing, the most recent of which clarified that the ETF only allows for creation of shares in cash and changed the fund's ticker from IBTC to IBIT. If approved, the ETF will trade on the Nasdaq.
Edited by Guillermo Jimenez.
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