Issuers have fixed three of the SEC's remaining concerns for spot bitcoin ETFs: Sources

Quick Take

  • Firms vying for a spot bitcoin ETF have been working on a range of issues with the SEC over the past few weeks, according to three sources.
  • The issues include which models to go with, naming authorized participants and hashing out how to manage hard forks and airdrops.

Firms vying for a spot bitcoin exchange-traded fund have been hard at work behind the scenes, addressing the Securities and Exchange Commission's concerns over spot bitcoin exchange-traded funds over the last several weeks in meetings with the regulator.

ETF issuers have been focusing on feedback, as indicated by high-ranking executives at multiple issuers and recent filings. These meetings have prompted companies like Grayscale to adopt a creation and redemption model preferred by the SEC. This has resulted in issuers agreeing to disclose authorized participants in what the source described as an unusual step. Additionally, concerns regarding hard forks have also been addressed.

In certain ETF structures, funds adhere to an "in-kind" redemption model, allowing investors to exchange shares for its underlying securities or commodities — typically to avoid tax penalties. In a cash model, the issuer must transfer the stored bitcoin and immediately sell it to provide cash. Companies like BlackRock have indicated their inclination towards adopting a cash model for their proposed spot bitcoin ETF, and Grayscale is the latest to follow suit.

"The SEC asked everyone if you want to be in the first wave you have to be cash," the source said.

Grayscale falls in line

Grayscale had been pushing for in-kind, but acquiesced to the SEC’s desires, according to a source familiar.

In a meeting with the SEC ahead of the Christmas holiday, Grayscale argued it should offer both in-kind and cash create and redemption models. The U.S. ETF marketplace has 86 commodity ETFs, Grayscale said, of which 15 are “true, physically-backed commodity ETPs.” All of those products have an in-kind redemption and creation model, it added.

“In the 30-year history of the US ETP marketplace, all spot commodity ETPs have employed in-kind only primary market transactions,” Grayscale said during the meeting, according to the source. “Caution should be exercised before breaking with this convention, for the first time, as it relates to the approval of spot Bitcoin BTC +1.47% ETPs.”

This argument did not persuade the agency to change its mind. On Dec. 26, Grayscale amended its S-3 form to adopt the cash model.

Naming the big banks

Over the course of amended filings over the last few days, firms keen to list a spot bitcoin ETF have begun naming authorized participants, which the issuer-linked source said is not customary but something the SEC pushed for.

BlackRock, for example, named Jane Street Capital and JP Morgan Securities LLC as authorized participants over the past week. Valkyrie named Jane Street Capital and Cantor Fitzgerald. Authorized participants are registered broker-dealers used in the creation and redemption processes, something that has emerged as a key point of interest in ongoing talks with the SEC.

Handling airdrops

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An additional issue that has been resolved pertains to managing hard forks and airdrops.

Forks occur when there is a modification in the code, leading to a new version of the blockchain. Notably, the Bitcoin network split into what's currently known as Bitcoin and another network known as Bitcoin Cash in 2017.

According to the source, discussions have revolved around establishing protocols to decide the course of action in the event of a fork. It has been agreed among issuers that trusts will relinquish any entitlements to a hard fork that diverges from the main chain, they said.

On Dec. 26, Grayscale amended its 3-S form to specify that its spot bitcoin ETF, if approved, would not receive any tokens through either a hard fork or an airdrop.

Top of the agenda

Exchanges have been busy meeting with the SEC this week as NYSE and Nasdaq met with the agency to discuss pending filings, according to two sources.

A person familiar with the matter said the SEC and Nasdaq met on Wednesday to discuss a spot bitcoin ETF, among other topics. A different source confirmed the NYSE meeting on the same day, which had been scheduled a week earlier. Fox News said there was a third meeting with the Chicago Board Options Exchange, citing its own sources.

The meetings don't indicate any changes as to whether a spot bitcoin ETF will get the SEC's sign off, the source said. They also couldn't comment on timing for when a spot bitcoin ETF would get the SEC's approval or disapproval. 

A different story for Ethereum

A high-placed executive at an issuer claimed that the notion of a spot ether ETF is still up in the air due to one overlooked reason.

The source said that the SEC's approval of futures-based bitcoin ETFs forced its hand to eventually approve a spot fund. This is because the agency disapproved previous proposals based on price manipulation, which issuers for a spot fund were able to address. It also provided a legal basis to fight for a spot fund, which was evident in Grayscale’s fight with the SEC.

As for ETH, the SEC hasn’t provided disapproval for such a fund and thereby has not back itself into a corner.


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About Authors

Sarah is a reporter at The Block covering policy, regulation and legal happenings. Before, Sarah was a reporter with CQ Legal writing about securities regulation, which is where she first started reporting on crypto. Sarah has also written for The Bond Buyer and American Banker, among other finance-related publications. She graduated from the University of Missouri and earned a degree in print and digital journalism. Sarah is based in Washington D.C., and is an avid coffee lover. You can follow her on Twitter @ForTheWynn.
Frank Chaparro is Host of The Scoop podcast and Director of Special Projects. He also writes a biweekly newsletter. Chaparro started his career at Business Insider, where he specialized in the intersection of digital assets and Wall Street, market structure, and financial technology. Soon after joining Business Insider out of Fordham University, Chaparro was interviewing top finance and tech executives, including billionaire Mark Cuban, “Flash Boys” star Brad Katsuyama, Cboe Global Markets CEO Ed Tilly, and New York Stock Exchange President Tom Farley. In 2018, he become a sought after reporter in the crypto world, interviewing luminaries such as Tyler Winklevoss, the cofounder of Gemini, Jeremy Allaire, the CEO of Circle, and Fundstrat head Tom Lee. For inquiries or tips, email [email protected].

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