After dozens of "tussles" with the SEC, Bitcoin Spot ETF Gets Final Two Conditions Before Approval

The creation of an ETF is the process of selling new ETF shares to investors on behalf of the issuer, and there are two main types of creation: cash creation and physical creation. In cash creation, large institutional investors or Authorized Participants provide cash to the ETF, which is used by the ETF management company to purchase the assets that make up the index tracked by the ETF (i.e., Bitcoin) and issue the corresponding value of ETF shares to investors. This approach is simple, flexible, and easy to understand, and is appropriate when the ETF's assets are difficult to access directly. Bitcoin, however, does not appear to be difficult to obtain.

In contrast, in-kind creation involves investors directly providing the stocks or other assets that make up the index tracked by the ETF, rather than cash. These assets are directly exchanged for equivalent ETF shares, thereby reducing transaction costs. In the case of a Bitcoin ETF, in-kind creation represents the direct purchase of shares of a spot Bitcoin ETF by an investor using Bitcoin. Both creation methods are designed to flexibly adjust the number of ETF shares in response to market demand and to ensure that their price is in line with the actual value of the tracking index or portfolio of assets.

Readers reading this must be wondering, if I already own bitcoin, why do I need to use bitcoin to buy an ETF that uses bitcoin as an investment asset? Isn't this the same thing? There are two reasons here.

The first reason doesn't have much to do with Bitcoin: ETF issuers are often willing to offer physically created options because they are tax-deductible. For example, if I buy an ETF made up of A, B, and C stocks, and I'm a holder of one of the A stocks, then exchanging the A stock directly for shares of the ETF is the equivalent of owning shares of all three companies at the same time, which is a diversified and risk-reducing investment, and since I'm not selling the securities, I don't have to pay any taxes on them in the U.S. tax code. If I choose to create in cash, then I would need to sell my A shares first, which would involve capital gains tax. Thus, ETF issuers generally offer both cash and in-kind options in their purchase choices, but in this case the SEC is only willing to allow Bitcoin ETF issuers to use cash as the only method of creation.

The second reason has a lot to do with Bitcoin: for high-capital-volume institutions looking for a safe bet, investing directly in digital currencies doesn't sound like a safe bet, especially after the several crashes of the last year. From a credibility standpoint, "we've invested in a very safe digital currency" is clearly a better way to convince asset management LPs than "we've invested in a financial investment ETF offered by BlackRock," which is why ETFs are more attractive to institutional investors than Bitcoin itself.

Because the process is a purchase of ETF shares, some news reports also refer to it as a cash call. Cash Redemption and In-kind Redemption, by contrast, represent the payment methods that investors who own ETF shares accept when they sell them.

Odaily previously reported that in another meeting between Grayscale and the SEC to discuss GBTC, Grayscale still insisted on pursuing in-kind redemptions. Bloomberg analyst James Seyffart also said, "I'm almost entirely on the side of Grayscale, BlackRock, and the other issuers that have pushed or are pushing for an in-kind approach. It's a simpler, more efficient way to run an ETF."