BlackRock has filed an amendment to its proposed spot bitcoin exchange-traded fund (ETF), adjusting the structure to enable easier participation by major Wall Street banks and brokerages.
The world’s largest asset manager originally submitted its bitcoin ETF application to the Securities and Exchange Commission (SEC) in January 2022. However, the proposal stalled as the SEC repeatedly delayed making a final decision.
Lead Up to BlackRock’s ETF Filing
For years, companies have tried unsuccessfully to launch spot bitcoin ETFs in the US. The SEC has consistently denied these applications out of concerns that the bitcoin market lacks sufficient regulation and surveillance to prevent manipulation.
While futures-based bitcoin ETFs have been allowed by the SEC, spot bitcoin funds remain elusive. Futures funds have seen tepid demand in 2022, with investors expressing stronger interest in direct exposure to bitcoin instead of derivatives.
| Date | Event |
|---|---|
| 2017 | The Winklevoss twins have their bitcoin ETF application rejected by the SEC |
| 2018 | 9 bitcoin ETF applications are withdrawn or rejected by the SEC |
| 2021 | The first US bitcoin futures ETF is approved |
| 2022 | BlackRock, Fidelity and others apply for spot bitcoin ETFs, decisions still pending |
The new hopefuls for spot bitcoin ETF approval have stressed robust third party surveillance in their proposals to assuage the SEC’s apprehensions.
BlackRock’s January filing specifically named crypto market makers Celsius and Paxos as authorized participants that can create and redeem shares directly with the ETF. This raised objections regarding credit risk and counterparty dependence.
Cash Redemption Model
To overcome these hurdles, BlackRock has now switched to a cash creation and redemption structure. This means authorized participants will exchange cash, rather than bitcoin itself, to create or redeem ETF shares.
The ETF will gain bitcoin exposure in the secondary market, buying and selling the cryptocurrency on major exchanges. This model gives Wall Street banks easier access for facilitating ETF transactions on behalf of clients.
Other spot bitcoin ETF applicants like Fidelity, Ark Invest and Wise Origin have also amended their filings to incorporate cash redemptions. This common shift signals that the SEC prefers the cash model.
Implications of Cash vs In-Kind Creation
| Cash Creation/Redemption | In-Kind Creation/Redemption |
|---|---|
| – Lower barriers to entry for major banks and brokers | – Direct ownership of bitcoin as an asset |
| – Reduced counterparty dependence | – Credit exposure to authorized participants |
| – More amenable to SEC concerns | – Higher risk of manipulation by creators |
While convenient for issuers and Wall Street, a cash model means the ETF will not directly hold bitcoin. This has sparked debate regarding whether cash-based funds detract from the core benefit of bitcoin’s fixed supply.
Despite these criticisms, analysts widely consider cash redemptions a “necessary compromise” for regulatory approval.
Race to the First Spot Bitcoin ETF
With BlackRock’s structural overhaul, the giant asset manager joins Fidelity and Ark Invest in shifting to a cash redemption setup preferred by the SEC. The amendments have stoked optimism of an imminent spot bitcoin ETF approval.
The SEC faces a statutory deadline of February 1st to approve or reject the amended BlackRock application. Here is the landscape of spot ETF contenders:
| Company | AUM | Filing Date | Amended Filing |
|---|---|---|---|
| BlackRock | $10 trillion | Jan 2022 | Dec 2022 |
| Fidelity | $11 trillion | Mar 2022 | Dec 2022 |
| Ark Invest | $28 billion | Jul 2022 | Dec 2022 |
| Wise Origin | N/A | Dec 2022 | Dec 2022 |
BlackRock emerges as the front runner given its scale and the SEC’s 90 day shot clock to now review the revised draft.
As the world’s largest asset manager, a BlackRock spot bitcoin ETF could accelerate institutional adoption and unlock trillions in capital inflows.
Response to Amended Filing
The bitcoin market greeted BlackRock’s amended filing enthusiastically, with the price rising 5% to over $17,000.
Investors are betting the adjustments will get the SEC greenlight, catalyzing mass Wall Street allocation into bitcoin.
Grayscale CEO Michael Sonnenshein said SEC approved spot ETFs can attract $30 trillion in advised wealth stored at wirehouses and private banks.
Other industry leaders like Fidelity Digital Assets and Bitwise CIO Matt Hougan echoed the milestone such products represent for professional investors.
Meanwhile, SEC Commissioner Hester Peirce said a spot bitcoin ETF is “past due” given satisfacotry infrastructure now. Peirce has previously dissented against rejecting bitcoin ETF applications.
Timeline for Final SEC Decision
With BlackRock’s amended filing, the SEC deadline for approval or rejection is February 1st, 2023. Fidelity and Ark Invest will face decisions in March.
The SEC historically uses its full time allotment so decisions are expected to culminate between February and March.
Possible Market Impact
Experts project that a spot bitcoin ETF approval could spur a new bull market, taking prices over $30,000 in 2023.
Easy access for wealth managers and advisers creates a huge pool of untapped capital.
As much as $200 billion could flow into bitcoin just from US retail wealth channels, as per Fundstrat estimates.
Citi analyst Joseph Ayoub said capital rotation out of gold into bitcoin and crypto can push bitcoin to $36,000.
Final Thoughts
BlackRock’s structural changes to accommodate a cash redemption model removes significant obstacles for a spot bitcoin ETF. With the SEC pressed against a 90 day deadline, expectations are high for the first approvals in February or March.
An eventual greenlight can release a flood of institutional capital into bitcoin and crypto, fueling the next major bull run. While futures funds saw muted interest, easy acquisition through ETF wrappers and advisers can reshape market dynamics.
Nevertheless, doubts persist around cash creation as detracting from bitcoin’s core thesis. And the heavy sway SEC preferences still hold over applicants shows the limitations of current market infrastructure.
As the ETF drama enters its final innings after 6 long years, investors straddle anticipation and weariness. Despite flaws in the cash model, the Crypto community agrees SEC approval represents validation and mass adoption being tantalizing close now.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
