The involvement of banks in the issuance of Bitcoin Spot ETFs, a recent initiative by BlackRock, represents a crucial step in the rapprochement between traditional financial institutions and the cryptocurrency universe. This move could not only facilitate the entry of institutional capital into this sector, but also redefine the way cryptocurrencies are perceived and managed within the global financial system.
Banks could play a crucial role in issuing Bitcoin spot ETFs
BlackRock had presented, on Tuesday November 28, 2023, a new model added to its Bitcoin spot ETF application in cooperation with banking institutions. This update would enable significant capital inflow into Bitcoin by making access to traditional financial institutions more accessible.
If BlackRock’s Bitcoin spot ETF application is approved, this amendment would empower banks to participate as an “Authorized Participant” (AP) in the ETF issuance process. This amendment would allow banks to own Bitcoin while avoiding previous administrative restrictions.
In the proposed revision of the Bitcoin spot ETF redemption mechanism, 3 models are presented:
The 1st, the original “In Kind” redemption model: here, APs play an essential role in facilitating redemption for investors. They receive the Bitcoin directly from the issuer when the ETF shares are redeemed, thus managing the conversion into dollars and limiting the impact on the Bitcoin price.
The 2nd cash redemption model: favored by the SEC, this model requires the issuer to sell the Bitcoin on the market to repay the APs in cash, who then redistribute to investors. APs have less asset management, as conversion is handled by the ETF issuer.
The 3rd model is a revision of the “In Kind” redemption model: offering APs greater flexibility, this model enables them to manage redemptions and Bitcoin fluctuations more effectively. It represents an evolution of the traditional “In Kind” model, with tax advantages and better risk management.
In this 3rd and proposed new model, IPs would transfer funds to a broker, who would then convert them into Bitcoin. These would then be held by the ETF issuer, in this case Coinbase Custody for BlackRock’s ETF.
BlackRock argues that this revised model provides greater resistance to market manipulation, an issue frequently raised by the SEC and its chairman, Gary Gensler, when rejecting previous Bitcoin spot ETF applications. This structure also aims to strengthen investor protection, reduce transaction costs and simplify the issuance of Bitcoin ETFs.
From December 8 to 12, 2023, the SEC welcomed 4 Bitcoin spot ETF applicants, including BlackRock and Grayscale, who had already been received several times during the previous 2 weeks.
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
Although the SEC has until mid-March 2024 to give its final verdict on the Bitcoin spot ETF applications, ETF analysts predict that decisions could be announced between January 5 and 10, 2024, when the SEC will have to give its final verdict on the Ark Invest & 21Shares ETF.
