BlackRock Revises Bitcoin ETF Model To Appease SEC Concerns

BlackRock executives held another meeting with the Securities and Exchange Commission (SEC) on Tuesday to discuss the firm’s application to launch a Bitcoin (BTC) spot ETF in the United States.

Based on publicly released notes from the meeting, the asset manager has modified its ETF blueprint to strike a compromise with the SEC between both groups’ ideal vision for a Bitcoin redemption model.

“This model appears to address the Staff’s concern with In-kind, addressing the critical dimension on which the In-kind model would otherwise be not preferred to the Cash model,” wrote BlackRock in its presentation.

As proposed last week, BlackRock’s “in-kind” redemption model was a six-step process for two separate market maker entities to adjust the supply of ETF shares on the market and redeem them directly for BTC. The process is meant to keep the share price joined at the hip with the value of the fund’s underlying BTC at all times.

The SEC has shown disagreement with BlackRock and other applicants – including Grayscale and ARK – over this model, due to the requirement for the U.S. registered broker dealer to interact with bitcoin directly, creating balance sheet risks.

The agency proposed an “In Cash” model in response which, while easier on broker dealers, would the fund’s efficiency and create significantly more steps for BlackRock.

BlackRock’s Revised Redemption Model

The company’s new model, however, keeps redemptions in-kind while adding just one more intermediary step: the market maker’s offshore entity prepays its U.S. based broker dealer entity with cash before ETF shares are redeemed for bitcoin.

“In so doing, it preserves the many significant benefits to investors of the In-kind model over certain Cash models in the context of bitcoin,” BlackRock argued. Some of these benefits include lower transaction costs, better resistance to market manipulation, and less risk during operating events.

It would also create “simplicity and harmonization across the ecosystem given significantly lower variance on how In-kind
models can be executed vs. Cash models,” added BlackRock.

Here's the original vs revised in-kind model, look like the new thing is STEP 4, which is the offshore entity market maker getting bitcoin from Coinbase and then pre-paying in cash to the US registered broker dealer (who is not allowed to touch bitcoin). pic.twitter.com/bDgYAnufWA

— Eric Balchunas (@EricBalchunas) November 29, 2023

As of November 17, Bloomberg ETF analyst Eric Balchunas claimed said that roughly two to three Bitcoin ETF applicants – of which there are roughly a dozen – appear to be following the SECs guidance for a cash-creation model.

Despite the negotiations, Balchunas stands by his previous prediction that an ETF has 90% odds of approval by January 10 – the final deadline to approve or deny ARK’s application.

Hashdex, another ETF applicant, also held a meeting with the SEC on Monday.