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Different spot Bitcoin ETF models; What will the SEC pick?

Different spot Bitcoin ETF models; What will the SEC pick?

Proponents of spot Bitcoin ETFs have discussed, with the Securities and Exchanges Commission (SEC), which redemption model to pick. While institutions seem to favor an ‘in-kind’ redemption, the SEC signals a preference for a ‘cash-only’ model.

Notably, BlackRock Inc. (NYSE: BLK) employees met with the authorities on November 28, according to a TheBlock report. In this meeting, the company presented a plan for what it called a ‘Revised In-Kind’ redemption model.

Essentially, the revised proposal would give all parties more flexibility for investors to redeem their ETF share worth. This model also offers tax advantages for BlackRock’s iShares and its custodian, Coinbase.

However, the SEC has signaled an adversary position for that possibility, favoring redemptions exclusively in ‘cash.’

Spot Bitcoin ETF redemption models: ‘in-kind’ or ‘cash-only’

At its core, the redemption models define what investors will receive when they disinvest from the fund. Redemption only applies for direct deals within the funds manager – like BlackRock – and not for exchange trades.

First, the in-kind model would mean investors redeem Bitcoin (BTC) in exchange for their ETF shares. In this context, the asset manager would pass the liquidation risk on to investors, as well as all tax obligations for selling the BTC.

This has been deemed counterintuitive, considering investors had previously bought their shares in U.S. Dollars (USD), not Bitcoin. If these investors want to keep the BTC themselves, they can directly purchase the cryptocurrency on the spot instead of paying the manager’s fees for the ETF.

On the other hand, the cash-only model would force the fund’s manager to liquidate the redeemed amount, selling Bitcoin and paying investors back in the same currency they first opted in, which is cash.

ETF experts comment on the different redemption models

Matt Walsh, a general partner at Castle Islands Ventures, believes in a 0% chance of the SEC approving the in-kind redemption model.

Meanwhile, the Senior ETF analyst for Bloomberg, Eric Balchunas, explained why the U.S. agency would prefer the cash-only model.

Interestingly, both experts signal a personal preference towards a revised in-kind redemption model. Either way, this recent news suggests a spot Bitcoin ETF approval could be just around the corner. 

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