The US Securities and Exchange Commission continues to actively engage with various fund issuers to discuss the launch of their proposed spot bitcoin ETFs. One key focus of these discussions is the operational aspects of such funds.
Valkyrie Chief Investment Officer Steven McClurg said on a Tuesday podcast that his company is addressing various structural issues with the SEC — particularly the process of creating and redeeming ETF shares. McClurg expressed optimism, saying he thinks they are “getting very close” to a resolution.
Financial behemoth BlackRock, which manages roughly $9 trillion in assets, most recently met with the SEC on Monday to discuss the company’s proposed iShares Bitcoin Trust, according to a filing.
The regulator also met with Fidelity on Dec. 7, as well as with Grayscale Investments and Franklin Templeton on Dec. 8, separate meeting disclosures show.
Nothing groundbreaking to report but 4 different issuers have met with the SEC regarding their #Bitcoin ETF filings in last few days. @BlackRock met with them yesterday for the third time in as many weeks. While @Grayscale, Franklin, and @Fidelity each had meetings last week pic.twitter.com/5gwBk83m0o
— James Seyffart (@JSeyff) December 12, 2023
“Both the Division of Trading & Markets and the Division of Corporate Finance were present at each of these meetings,” Bloomberg Intelligence analyst James Seyffart said in an X post. “Those are the two divisions that will ultimately decide if & when the 19b-4’s & S-1’s would be approved or denied.”
The SEC’s Division of Trading and Markets regulates entities such as broker-dealers, self-regulatory organizations and transfer agents. The corporation finance unit offers “interpretive assistance” to companies on SEC rules and forms.
“I see this as another strong signal that approval is coming, although perhaps confirmation of earlier signals as opposed to something new,” Bryan Armour, director of North America passive strategies research at Morningstar, said of the latest meetings. “Asset managers and the SEC are working out the finer points to ready these for the market.”
McClurg said during an ETF Prime podcast published Tuesday that Valkyrie and other fund groups are indeed having “very detailed conversations with the SEC on structure.” Valkyrie first filed for a spot bitcoin ETF in 2021, and re-filed for one in July — several weeks after BlackRock revealed its landmark proposal.
While various industry watchers have said they believe spot bitcoin ETF approval could come by Jan. 10 — the date by which the SEC is set to rule on a proposal by Ark Invest and 21Shares, and potential others — no issuers know for sure what will happen, McClurg added.
“The SEC really does understand bitcoin and how it works,” he told host Nate Geraci, president of The ETF Store, during the podcast. “I know a lot of people are frustrated, but at the same time, their job is to make sure that proper disclosures are in place and the capital markets are running efficiently. And they’re asking all the right questions.”
Cash versus in-kind creations, redemptions
Amendments to various bitcoin ETF applications suggest there are a number of topics the SEC is addressing with these firms.
But various meeting memorandums show continued discussions around the difference between in-kind and cash creation and redemption models.
With in-kind transactions, authorized participants exchange ETF shares for a corresponding basket of securities that reflects the ETF’s holdings. The other method is participants creating and redeeming shares in exchange for cash.
A document from Nov. 28 noted “the SEC has certain unresolved questions around the in-kind model.” Armour said the handling of creations and redemptions remains “the main issue.”
“The SEC doesn’t want broker-dealers touching bitcoin, and trusts can’t buy [or] sell bitcoin with cash,” Armour told Blockworks. “This has led to revised creation-redemption workflows by issuers in coordination with the SEC.”
McClurg and Armour agree the SEC is more likely to ultimately approve the cash creations and redemptions workflow, at least initially.
There are not many market makers able to transact in bitcoin, McClurg explained, noting regulations restrict broker-dealers from trading in non-securities, such as BTC. The SEC is likely to want as many participants as possible within the spot bitcoin ETF market.
Ultimately, Armour argued, spot bitcoin funds and their investors would benefit from an in-kind model, as trading costs would be borne by market makers or authorized participants.
He added: “There’s a chance that the SEC approves these funds as cash create [and] redeem-only while they continue to work on the mechanics of in-kind.”
An SEC spokesperson declined to comment.
