BlackRock, Fidelity, and other financial institutions have been meeting with the Securities and Exchange Commission (SEC) in recent weeks to discuss the redemption mechanism of Bitcoin spot ETFs. Vivian Fang, a finance professor at Indiana University, analyzed that the current focus is on which of the three redemption mechanisms to adopt, and the revised physical redemption model submitted by BlackRock may be sufficient to meet the SEC’s requirements.
The SEC has been meeting with financial institutions such as BlackRock and Fidelity to study the technical details of Bitcoin spot ETFs. These companies have discussed detailed information about the redemption process of Bitcoin spot ETFs with the SEC. Vivian Fang, a finance professor at Indiana University, said that the SEC seems to be in the review period and is finalizing the details that may be approved.
Vivian Fang analyzed the potential structure of Bitcoin spot ETFs and pointed out that the current focus of discussion is on three different redemption mechanisms: cash, physical, and revised physical redemption models. The purpose is to determine which entities need to settle Bitcoin during redemption. Regardless of which model is adopted, investors can exchange their shares for cash during redemption.
Regarding the physical redemption model, Vivian Fang said that asset management companies are very familiar with this model because it is the most commonly used model for stock ETFs. Under this model, retail investors who want to redeem their shares can obtain Bitcoin shares from BlackRock and then convert them to cash through brokerage firms.
The SEC may favor the cash redemption model, which requires BlackRock to transfer and sell its Bitcoin holdings immediately and then return the cash to investors. Fidelity also seems to support this model in its memorandum. The difference between the above models lies in whether the issuer such as BlackRock is willing to take on the risk.
Vivian Fang explained that if an asset management company holds 100 eggs and an investor wants to redeem all the eggs, the asset management company would not want to take on the conversion risk.
The revised physical redemption model presented by BlackRock in the meeting with the SEC in November may satisfy the SEC. Under this model, the asset management company does not need to liquidate its Bitcoin holdings immediately according to demand. This will reduce the impact of large-scale collective redemptions of ETFs and allow portfolio management to have greater flexibility without generating capital gains taxes.
Vivian Fang believes that the revised physical redemption model may be sufficient to satisfy the SEC. From the perspective of investors, there is no difference between the cash redemption model and the revised physical redemption model.
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Fidelity
SEC
Bitcoin spot ETF
BlackRock
Redemption