The issuer of the Bitcoin spot ETF has held 33 meetings with the U.S. Securities and Exchange Commission (SEC). The previous discussions focused on the issue of Bitcoin custody, but now the focus has shifted Now comes the method of generating and redeeming ETF shares.
There are two ways to generate ETF shares, one is physical exchange, and the other is cash purchase. A physical exchange involves authorized participants (APs) and market makers handing over bitcoins to an ETF issuer, who then hands over ETF shares to the AP and market makers for sale. This is essentially a physical exchange of Bitcoin for ETF shares, where the AP usually refers to a large U.S. bank. In cash buying, AP and market makers hand over cash to the ETF issuer, and the issuer purchases Bitcoin. This was explained in detail in my article yesterday, the entire generation and redemption methodBlackRock’s latest proposal—the difference between the SEC’s preferred cash redemption model of Bitcoin spot ETFs and the physical redemption model.
The main difference between these two methods is who buys Bitcoin. Physical swaps have Bitcoin purchased by market makers and APs, while cash buys are purchased by ETF issuers. Although seemingly irrelevant, the difference between these two methods is extremely important in the SEC's view. Among the more than 3,000 ETFs in the United States, most generate shares through physical exchange, and only a few purchase them through cash. However, this time the SEC strongly requires applicants for Bitcoin spot ETFs to use cash purchase methods. Even though many Bitcoin spot ETF issuers are currently unwilling to adopt the cash purchase method, after intensive meetings with the SEC, they had to modify their prospectuses to adapt to the SEC's requirements. Companies like Invesco, Bitwise and Valkyrie were the first to accept cash buy-ins. On December 18, big-name celebrities Mujie and BlackRock also accepted the cash purchase method after revising their prospectuses many times. Now they only require approval.
For the physical exchange method, if the AP and the market maker already own Bitcoin, or obtain a large amount of Bitcoin from other sources, they There is no need to buy in bulk in the market. These Bitcoins may come from people looking to exchange Bitcoins from unknown sources for clean US dollars. In this case, APs and market makers do not need to investigate the source of each Bitcoin when receiving it. For example, when Grayscale's GBTC is open to private users, it can receive Bitcoin spot or cash, and when receiving Bitcoin spot, there is no need to investigate the source of each Bitcoin.
In contrast, the cash buy method requires APs and market makers to hand over cash to the ETF issuer, who then Party to buy Bitcoin. Transactions in this way are clearly recorded, and people like BlackRock or Mutoujie will not buy Bitcoin on trading platforms that are not regulated by the United States.
SEC needs to supervise many things, but it also needs to let go of many things. Therefore, the SEC has drawn a line, and from here on, all matters need to be clearly declared, and things before were really difficult to manage.
For ETF issuers and people who want to buy Bitcoin ETFs, physical exchange is of course the best choice. APs and market makers buy Bitcoin so that ETF issuers don’t need to set up specialized departments to buy and sell Bitcoin. Over the past 30 years, the task of buying and selling underlying assets has been the responsibility of APs and market makers. ETF issuers are only responsible for administrative work and do not participate in actual transactions. For those who buy ETFs, using a physical exchange method also saves taxes.
However, SEC does not allow issuers of Bitcoin ETFs to use physical exchange methods, mainly for two reasons:
In addition to the cash redemption model mentioned in yesterday's article, it is simpler to operate, makes the regulatory process more direct and transparent, facilitates effective monitoring and auditing by regulatory agencies, and can also reduce In addition to the risk of large-scale redemption or purchase activities directly affecting the Bitcoin market price, thus reducing the possibility of market manipulation:
SEC believes that doing so may provide a way for money laundering.
Under current regulations, large U.S. banks are not allowed to purchase Bitcoin directly
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If the SEC allows physical exchange, it would be equivalent to allowing banks to purchase Bitcoin directly by default. If barter is allowed, BlackRock and Grayscale would have first-mover advantage. For example, BlackRock reached an agreement with Coinbase in August last year to issue private trusts to help institutional users and high-net-worth individuals hold Bitcoin. If a new Bitcoin spot ETF can be issued, BlackRock may put the Bitcoin it already holds into the new ETF, thereby expanding its management scale. For Grayscale’s GBTC, if it can import the 620,000 Bitcoins it holds into a new ETF, no one can match it in terms of management scale. But if the cash purchase method is used, Grayscale may not be able to import previous Bitcoins into the new ETF, depending on SEC regulations.
After approval, they still need to wait for a few days to start trading, which is uncertain because there is no requirement to start trading after a few days, especially with In the case of cash purchase method.
In addition, ETF issuers need time to find people to set up a team to trade Bitcoin. For those who want to buy ETFs, it is not yet 100% certain whether this method will increase the tax burden. Neither Bloomberg’s top analysts nor tax lawyers can tell clearly, because in the history of the United States, there are no ETFs with commodities as the underlying assets that use cash purchases to generate shares. They all use physical exchange.
When is the first Bitcoin spot ETF expected to be released at the earliest?
Speaking of which, no one can say whether the SEC will approve GBDC and Mu Mu’s ARKB on the same day. But there is a high probability that after this discussion is over, there will not be many points to argue about. The U.S. Securities and Exchange Commission (SEC) is currently reviewing the Bitcoin spot ETF applications submitted by 13 companies, and the 13th company applied longer than the first 12 companies. Night. There is hope that the SEC will approve the applications of these 12 companies at once. This expectation stems from the SEC’s previous approval model. The approval process includes an initial period of 45 days, with three possible extensions (45 days, 90 days, and 60 days), for a total maximum of 240 days. The necessary processes for the first nine companies have been completed, and the comment period for the tenth Global X will end on December 22; the final deadline for ARKB is January 10. HashDex and Franklin are still in the comment period, which ends on January 5. The SEC's timeline indicates that approvals for the first batch of 12 companies may be completed between January 8 and 10.
But this is just a personal opinion, not a definite result; the SEC may not approve any company. Even if Grayscale wins the lawsuit, the judge can only ask the SEC to reconsider the decision but cannot force approval.
In the encryption industry, everyone is in the exploratory stage. If the SEC first approves the cash purchase method, it may gradually turn to approve the physical exchange method in the future.
After the meeting between the SEC and ETF issuers, the meeting time and participants will be announced. If there is a PPT speech, the PPT will also be announced. But several people sat there facing each other and discussed and argued in detail. This was not public. We can only understand the situation through public information and the reactions of various ETF issuers, and Aiying will continue to follow up.
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