BlackRock adjusts proposed spot Bitcoin ETF structure to allay SEC concerns

BlackRock has submitted revisions to its spot Bitcoin ETF application to the SEC in an attempt to allay the regulator’s concerns over market manipulation and broker-dealer registrations, according to meeting minutes between the asset manager and the SEC’s Division of Trading and Markets dated Nov. 28, 2023.

BlackRock’s proposed solution modifies the current in-kind redemption model that would have the offshore market maker entity prepay cash to the registered broker-dealer entity prior to the delivery of ETF shares during the redemption process. This “prepaid model” aims to isolate the broker-dealer on its balance sheet from risks associated with transferring Bitcoin to the market maker.

Additionally, BlackRock argues that retaining an in-kind structure, even with alterations, provides benefits over shifting to a cash redemption method, including lower transaction costs, simpler operations, and resistance against manipulation schemes. The asset manager believes addressing the balance sheet and broker-dealer registration dependencies directly through adjusted timing and custody transfers allows the Bitcoin ETF application to clear regulatory procedures while optimizing shareholder incentives.

Whether the updates provide sufficient guardrails to offset SEC unease regarding spot Bitcoin exposure for retail investors through an ETF remains unclear.

Race to approval

The push for a spot Bitcoin exchange-traded fund (ETF) has seen increased momentum in recent months as major financial institutions like BlackRock and Fidelity Investments have thrown their hats into the ring with filings to the Securities and Exchange Commission (SEC).

Despite the excitement, significant obstacles remain in the way of securing regulatory approval. The SEC has consistently demurred on spot Bitcoin ETFs in the past, denying previous applications due to concerns about manipulation and inadequate surveillance mechanisms.

The Commission’s recent feedback on the latest round of filings again focused on those concerns, suggesting the applications did not provide sufficient clarity around critical details like the specific spot exchanges that would conduct surveillance-sharing agreements.

On Nov. 17, rumors circulated on social media that indicated the SEC may have instructed applicants to utilize cash creation processes instead of in-kind Bitcoin transfers, marking a potentially seismic shift that would place a greater onus on issuers to handle Bitcoin transactions behind the scenes. This has not been confirmed, but if implemented, the structure could allow broker-dealers to avoid direct crypto dealings that register outside the current regulatory purview.