BlackRock Compromises on Bitcoin ETF Market Manipulation Row

• BlackRock has made a change to its Bitcoin ETF application to address the SEC’s market manipulation concerns.
• An Expert has described the change as a good sign.
• The next deadline for an SEC decision on BlackRock’s ETF is less than a month away.

In June 2023, the entrance of BlackRock into the Bitcoin ETF race sparked significant hopes of an imminent approval. However, in recent weeks, a tussle between the SEC and BlackRock over the latter’s proposed redemption model sparked uncertainty. Amid the back and forth, BlackRock has made a compromise to address the regulator’s concerns.

BlackRock Goes Cash Only 

In recent weeks, the SEC has made its stance on cash-only creations and redemptions for Bitcoin spot ETF applications clear, following changes from applicants Invesco, Galaxy Digital, and ARK Invest. However, BlackRock had held out, pitching a hybrid model combining both cash and in-kind redemptions—till now.

In an update to its filing dated Monday, December 18, BlackRock joined other applicants to yield to the SEC’s demands. The firm revealed that it would also be implementing cash-only redemptions and creations till such a time that the SEC would approve in-kind redemptions.

The change implies that new shares in the ETF will only be created using cash as opposed to the underlying asset: Bitcoin. The same will apply to share redemptions.

Responding to the change, Bloomberg ETF analyst Eric Balchunas described it as a “good sign.”

“BlackRock has gone cash only. That’s basically a wrap. Debate over. In-kind will have to wait. It’s all about getting ducks in row bf [before] holidays,” he wrote.

The SEC’s Concerns Over In-Kind Redemptions

The SEC maintains the view that in-kind redemption models leave room for market manipulation. The view stems from fears that entities with large holdings could influence the ETF value with in-kind redemptions to create profitable arbitrage opportunities from the resulting price disparity with the underlying asset, in this case, Bitcoin.

Despite the SEC’s position, Bloomberg’s Balchunas has argued that the in-cash model is less efficient for taxes. 

Regardless of the creation model, the creation of ETF shares will lead to increased Bitcoin demand as the asset would still be purchased to hold in trust on behalf of investors.

The next deadline for the SEC to decide on BlackRock’s spot ETF application is January 15, 2024. Investors would hope that BlackRock’s recent compromise would boost the chances of approval.

On the Flipside

• The wording of BlackRock’s change suggests that the firm has not totally given up on in-kind redemptions.
• Aside from the redemption model change, BlackRock also made several other changes to its Bitcoin ETF application, including a terminological change to Coinbase’s role from Prime Broker to Prime Execution Agent.

Why This Matters

BlackRock’s recent compromise to comply with the SEC’s wishes clears a significant hurdle ahead of the January 2024 deadline.

Read this to learn more about the SEC’s concerns:

BlackRock’s ETF Approval Uncertain: What Does the SEC Want?  

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