Asset Managers Vie for In-Kind Redemptions in Talks with SEC for Bitcoin ETF Approval

Recent discussions between major asset managers and the U.S. Securities and Exchange Commission (SEC) centered on the mechanics of potential spot Bitcoin exchange-traded funds (ETFs), focusing notably on the method for handling redemptions.

BlackRock, along with its exchange partner Nasdaq, engaged in talks with the SEC regarding redemptions, specifically addressing how the fund would manage investor exits and redemption of share value.

This critical element of redemptions remains a sticking point for approval, with the SEC favoring cash redemption. However, issuers like BlackRock and Ark Invest are advocating for in-kind redemption, wherein market makers receive Bitcoin in return for the ETF shares, subsequently selling the received Bitcoin for cash.

The in-kind redemption process involves authorized market participants, enhancing tax efficiency by avoiding the need to sell securities for redemptions that might trigger capital gains taxes. This structure, deemed the "cleanest" by experts, presents benefits for both issuers and investors.

Eric Balchunas, an ETF analyst at Bloomberg Intelligence, highlighted the SEC's perspective, noting that cash redemption places the responsibility on issuers to transact in Bitcoin, relieving broker dealers from engaging with unregistered subsidiaries or third-party firms for Bitcoin-related dealings.

While some issuers may prefer cash redemption, major players such as BlackRock, Ark Invest, and Grayscale advocate for in-kind redemptions. Balchunas referred to this discussion as the latest subplot in the ongoing saga surrounding Bitcoin ETF approval.

Despite differing preferences, analysts at Bloomberg Intelligence maintain a 90% likelihood of a spot Bitcoin ETF approval by January 10, 2024. They consider this ongoing discussion and the SEC's engagement as a positive sign, indicating progress and a possible resolution regarding the preferred redemption method for Bitcoin ETFs.