SEC's Latest Instruction To Applicants Suggests A Pivotal Shift In Bitcoin ETF Landscape

The U.S. Securities and Exchange Commission (SEC) has reportedly instructed spot Bitcoin exchange-traded fund (ETF) applicants to amend their filings and utilize cash instead of in-kind creations – a move to perhaps appease brokers. The development could potentially turn the Bitcoin ETF landscape around.

While rumors of an imminent SEC approval on the spot Bitcoin ETF filings spread like wildfire online and triggered bullish sentiment, particularly on BTC, it looks like the financial regulator is not yet ready to allow a crypto vehicle to be available this year.

The major Wall Street regulator, particularly its Division of Trading and Markets, reportedly talked to exchanges last week on their Bitcoin ETF applications and recommended they submit amendments detailing cash creations rather than in-kind creations, Bloomberg Intelligence ETF analyst Eric Balchunas shared.

"Hearing chatter SEC's Trading and Markets engaged w/ exchanges this week on spot bitcoin ETF 19b-4s, is advising them they'd like the ETFs to do cash creates (vs. in-kind), and has asked them to get in amendments in next couple wks. This isn't unexpected but a good sign nonetheless," Balchunas said. "Cash creates makes sense IMO bc broker-dealers can't deal in bitcoin so doing cash creates puts onus on issuers to transact in Bitcoin and keeps broker dealers from having to use unregistered subsidiaries or third-party firms to deal w (with) the btc. Less limitations for them overall."

Based on the information, the SEC preferred Bitcoin ETFs to execute cash creations – a shift, which is not entirely surprising, as it underlines the commission's approach to handling the complexities of cryptocurrency-based exchange-traded funds.

But, what does this mean?

ETFs can create or redeem shares either in kind, by swapping Bitcoin for ETF shares, or with cash by buying or selling BTC in the open market to balance supply and demand.

Cash instead of in-kind creations means that broker-dealers, who are at present unable to directly deal with Bitcoin because of regulatory constraints, will no longer have to worry. The approach also streamlines the process for brokers since they won't have to deal with unregistered subsidiaries or third-party firms to deal with Bitcoin.

Balchunas said that among the 12 applicants, only two or three companies mentioned cash creations, with all the rest planning to use the in-kind approach.

The ETF analyst also underlined that cash creations will benefit the SEC while in-kind is better for investors, particularly in terms of spread and taxation.

"My point on cash creates was that I could see the SEC's POV for wanting it but from the investor's POV in-kind arguably better in terms of the spread and taxation. So poss we see some issuers push for in-kind (perhaps successfully) in engagement w/ Staff," Balchunas said in a follow-up tweet.