The SEC Instructs Spot Bitcoin ETF Applicants on Fund Handling

The SEC Instructs Spot Bitcoin ETF Applicants on Fund Handling

A recent report by Bloomberg analyst Eric Balchunas suggests that securities regulators are advising spot Bitcoin ETF applicants to handle funds in a specific manner. The report reveals that the Securities and Exchange Commission’s (SEC) Trading & Markets division has engaged with exchanges, urging ETFs to opt for cash creates instead of in-kind creations. This new approach brings attention to the complexities surrounding Bitcoin transactions within the ETF market.

In traditional in-kind creation, a participating firm or institution would exchange matching assets, in this case Bitcoin, to receive shares of the spot Bitcoin ETF. On the other hand, a cash creation involves exchanging cash for ETF shares. Balchunas explains that the preference for cash creates in spot Bitcoin ETFs stems from the inability of broker-dealers to deal in Bitcoin directly. This approach avoids the need for broker-dealers to rely on unregistered subsidiaries and third-party firms, potentially presenting fewer limitations overall.

The shift from in-kind to cash creates could have significant implications for spot Bitcoin ETF applicants. Balchunas estimates that only a select few of the current applicants were planning to use cash creates, meaning other firms may have to revise their proposed fund handling methods or risk delays in their application process. The lack of public details from the SEC regarding its engagement with ETF applicants makes it challenging to confirm the source of the rumor or the extent of its recommendations.

Despite the lack of official confirmation, Balchunas remains confident in his earlier prediction that there is a 90% chance of a spot Bitcoin ETF gaining approval by January. The reported engagement between the SEC and ETF applicants is seen as a positive sign, indicating that the SEC has a clear path forward. However, it is essential to note that these developments were not officially disclosed by the SEC.

Late September saw the SEC reaching out for input on various ETF applications, raising the credibility of the rumor surrounding cash creates. These inquiries primarily addressed concerns surrounding market manipulation and surveillance-sharing agreements, aligning with known controversies in the ETF space. As an application from ARK Invest awaits a decision deadline of January 10, 2024, it is expected that the SEC will approve or reject a spot Bitcoin ETF in the early months of next year.

The SEC’s reported instructions to spot Bitcoin ETF applicants regarding fund handling methods offer new insights into the evolving landscape of cryptocurrency ETFs. The transition from in-kind creations to cash creates introduces a potential solution to the limitations faced by broker-dealers when dealing with Bitcoin. While the rumor of SEC engagement remains to be officially verified, the indications of a clear path forward and the impending decision deadline for a spot Bitcoin ETF application paint an optimistic picture for the future of cryptocurrency ETFs.


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