SEC rumored to be instructing spot Bitcoin ETF applicants to incorporate cash creates

Bloomberg analyst Eric Balchunas reported on Nov. 17 that securities regulators are instructing spot Bitcoin ETF applicants to handle funds in a specific way.

In a post on X, Balchunas wrote:

“Hearing chatter [that the Securities and Exchange Commission’s Trading & Markets division] engaged [with] exchanges this week on spot bitcoin ETF 19b-4s, is advising them they’d like the ETFs to do cash creates (vs in-kind), and has asked them to get in amendments in next couple [weeks].”

In an in-kind creation, a participating firm or institution would deliver matching assets, in this case Bitcoin, and receive shares of the spot Bitcoin ETF in return. In a cash create, the participant would instead deliver cash to receive shares of the ETF.

Though in-kind creations are common, Balchunas explained that cash creation might be preferred in the case of spot Bitcoin ETFs because broker-dealers cannot deal in Bitcoin. He said that cash creates would leave issuers responsible for transacting in Bitcoin, while brokers would be allowed to avoid relying on unregistered subsidiaries and third-party firms. Balchunas said that this approach would result in “less limitations” overall.

Balchunas estimated that only two or three of the current spot Bitcoin ETF applicants planned to do cash creates prior to the rumor, meaning that the other firms may have to adjust the content of their filings or risk having their application delayed.

Balchunas said that the current development does not change his prediction that there is a 90% chance of a spot Bitcoin ETF approval by January. He called the development a “good sign” and an indication that the SEC has a path forward.

Rumor is unverified

Balchunas did not provide any source for the rumor, and the SEC has provided few public details about the ways in which it is engaging with ETF applicants.

However, the SEC began to seek input on various ETF applications starting in late September, lending credibility to the rumor that cash creates may have been one of the ideas put forward. Those questions otherwise focused on known controversies, such as concerns around market manipulation and surveillance-sharing agreements.

The SEC is expected to approve or reject a spot Bitcoin ETF by early next year, as an application from ARK Invest has a decision deadline of Jan. 10, 2024.