Bitcoin ETF Hurdles: Cash Redemptions, Hard Forks, Authorized Participant Disclosure Discussions With SEC

Even as firms seeking approval for a spot Bitcoin BTC/USD exchange-traded fund (ETF) held several rounds of meetings with the U.S. Securities and Exchange Commission (SEC), the discussions have revolved around the model of redemption, hard forks in blockchain technology and the redemption model of the ETFs. 

One of the primary areas of discussion has been the redemption model for these ETFs, a Coinspeaker report stated, quoting sources.

Traditionally, ETFs follow either an “in-kind” or cash redemption model.

The former allows investors to exchange shares for the underlying securities or commodities without triggering tax penalties.

However, the SEC has reportedly been urging ETF issuers, including industry giants like Grayscale Investments and BlackRock Inc. BLK, to adopt a cash redemption model.

Grayscale, initially advocating for an in-kind redemption model, eventually yielded to the SEC’s preference.

In a meeting held before the Christmas holiday, Grayscale proposed offering both in-kind and cash redemption models.

However, the SEC insisted on a cash model, leading Grayscale to amend its S-3 form on Dec. 26, signaling its acceptance of the cash model.

Furthermore, the SEC has asked issuers to disclose authorized participants, a step not traditionally taken in the industry.

BlackRock, among others, has complied, naming broker-dealers such as Jane Street Capital and JPMorgan Securities LLC as authorized participants.

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Another major issue raised in recent discussions is the issue of hard forks in blockchain technology.

When a blockchain undergoes code modifications, resulting in the emergence of a new version, it triggers a fork.

Industry players have reportedly reached a consensus on protocols to handle potential hard forks. In the event of a fork diverting from the main chain, trusts associated with the ETFs are expected to relinquish any entitlements.

Additionally, firms have clarified their positions on receiving tokens through hard forks or airdrops.

Grayscale, in an amendment to its S-3 form, explicitly stated that its spot Bitcoin ETF, if approved, would not receive any tokens through these processes.

Recent meetings of major exchanges, including NYSE, Nasdaq Composite and the Chicago Board Options Exchange with the SEC have sparked speculation about the timing and potential approval of a spot Bitcoin ETF.

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