Spot Bitcoin ETF Issuers Kowtow To SEC Demanding In-Cash Redemptions

Some prospective spot Bitcoin ETF issuers are kowtowing to the will of the U.S. Securities and Exchange Commission by abandoning immediate plans for “in-kind” share redemptions.

Updated SEC filings from Valkyrie in addition to Invesco and Galaxy Digital both state the creation and redemption of shares will initially be executed in-cash. This means investors offloading ETF shares would receive fiat currency after the underlying Bitcoin represented by their shares is sold.

By contrast, “in-kind” redemption would allow investors to redeem their ETF shares for the underlying Bitcoin, offering tax, spread, and other efficiency benefits over in-cash redemptions.

However, the amended filings state that Valkyrie and Invesco hope to facilitate in-kind redemptions in the future.

“Creation orders may be denominated and settled in cash or, subject to in-kind regulatory approval, in an amount of Bitcoin,” Valkyrie said in its latest filing.

“In the future, the Trust may permit or require creation and redemption transactions to take place in-kind,” said Invesco.

ETF applicants update filings after SEC meetings

The updated applications come after several meetings between the U.S. Securities and Exchange Commission (SEC) and prospective spot Bitcoin ETF issuers in recent weeks.

While BlackRock, widely touted as the front-running spot Bitcoin ETF applicant and the world’s largest asset manager, has expressed a preference for in-kind redemption, researchers are interpreting the updated filings from Valkyrie and Invesco as indicating the SEC remains steadfast in its preference for in-cash delivery.

“Invesco is committing to cash creates only… pretty big clue that SEC is dug in on only letting cash-create ETFs out in first run,” tweeted Eric Balchunas, a senior ETF analyst at Bloomberg. “Assuming it’s cash or wait (which is pretty good assumption at this point) the big [question] is does BlackRock bend the knee too?”

“Valkyrie going cash model now as well,” said Scott Johnsson, a finance lawyer and associate at Davis Polk & Wardwell LLP. “[Either] they don’t know where SEC lands… and so they’re updating to cash with flexibility to move to in-kind [or] they know the SEC is standing firm here and so this is just a reflection of that reality.”

“I think everyone is gonna have to bend the knee to cash creates and redeems,” commented James Seyffart, a Bloomberg analyst. Seyffart added that Bitwise updated its application to support in-cash redemptions from Dec. 4.

SEC warms to spot Bitcoin ETFs?

On Dec. 14, SEC chairman, Gary Gensler, made comments suggesting his agency may be open to approving a spot Bitcoin ETF soon.

“We had in the past denied a number of these applications, but the courts here in DC in on that,” Gensler said. “We’re taking a new look at this based upon those court rulings.”

Gensler’s comments referred to the U.S. Court of Appeals overturning the SEC’s rejection of Grayscale’s bid to convert its Bitcoin Trust into an ETF. The SEC chose not to appeal the ruling in October.

Seyffart and Balchunas have long tipped that the SEC will approve an initial batch of spot Bitcoin ETFs around Jan. 10, 2024.

While the existing applications for spot BTC exchange-traded funds propose offering direct exposure to BTC, First Trust filed for a Bitcoin “Buffer ETF” on Dec. 14. The proposed product would offer partial protection against downside movements in Bitcoin’s price while capping potential profits.

SEC delays Ether ETF deadline

On Dec. 13, the SEC delayed its deadline to deliver a verdict on a spot Ether ETF proposed by Invesco and Galaxy Digital until Feb. 6. The SEC said it needs more time to assess the application.

On Dec. 5, the SEC also delayed BlackRock’s Ether ETF application until late January.

On Dec. 13, Johnsson speculated that a spot Ether ETF is far less likely to receive approval than a spot Bitcoin fund. Johnsson cited a lack of precedent for the SEC approving ETH futures products filed via 19b-4 applications and the comparatively less mature futures Ether ETF landscape as reasoning for his skepticism.

However, Balchunas disagrees, recently telling The Defiant he doesn’t “see any reason for them to deny Ether given they have approved Ether futures."