According to Eric Balchunas, ETF analyst at Bloomberg, it is almost certain that regulators will force Bitcoin (BTC) ETF applicants to adopt a “cash creation” model before launching their highly anticipated investment products bring.
If true, the decision would have a significant impact on the costs of managing each fund – and therefore the fees passed on to clients.
Benefits in kind vs. cash benefits
Since last month, BlackRock and other applicants have held multiple meetings with the Securities and Exchange Commission (SEC) regarding their “redemption model” – the process by which their ETF shares are held in line with the value of the fund's underlying BTC.
Sponsors like BlackRock have pushed for an “in-kind” redemption model, in which a registered intermediary transfers Bitcoin (BTC) to the ETF issuer whenever it needs to issue new fund shares to meet market demand.
In contrast, the SEC is pursuing a cash-creation model that requires intermediaries to send cash to an ETF issuer, which is then used to purchase the needed BTC. The additional step prevents intermediary broker-dealers from having to personally handle real BTC, which is a taboo for the regulator.
Still, there are costs. As Balchunas explained on a Thursday post to X:
“The creation of cash has a worse tax impact because cash changes hands, whereas in-kind contributions are simply trade and no cash changes hands. Therefore, Bitcoin ETFs that only create cash are not ideal and negate a major advantage of the ETF structure.”
Tax on early capital gains
By simply completing the cash-to-BTC conversion, ETF issuers would be subject to capital gains tax if they need to sell their fund's BTC.
According to another Bloomberg analyst James SeyffartThis could result in ETF holders being forced to recognize profits when they otherwise would not have done so.
“This is how *all* mutual funds work, because mutual funds are based on the creation and redemption of cash,” he explained. “Should be more of an inconvenience than anything else for most people.”
The Grayscale Bitcoin Trust (GBTC) The switch to an ETF could be the most affected by such a change, as the fund has been holding its clients' BTC for years at far lower prices than today.
Balchunas added that cash-created ETFs are likely a “done deal” based on internal discussions and various updated ETF filings from applicants.
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