When people or institutions who buy Blackrock's iShares Bitcoin ETF in 2024, want to sell it one day, how will they be redeemed? Will they receive their Bitcoins or the equivalent in cash? This is what was on the table during the latest meetings between the Sec, Blackrock's representative, and a NASDAQ senior officer.
Let's first explain the difference between an in-cash vs an in-kind redemption.
When talking about how investors will be able to sell their stake in the Spot Bitcoin ETFs, we need to determine their options: they can either withdraw by receiving a cash settlement or the asset (Bitcoin) itself. These methods are known in the financial world as an in-cash or an in-kind redemption. Let's dive a little deeper:
- by using this redemption method the investor receives the value of his investment in the form of cash. The ETFs will sell the amount of Bitcoin on the open market, and send the cash to the investor through various means such as bank transfers, checks, or electronic transfers. For investors who do not want the struggle of having to receive their Bitcoin and sell it themselves, this is a good option. It is also what the SEC demands. This method is the most liquid as the investor receives cash immediately, yet needs to pay transaction fees. Important to notice is that with in-cash redemption everything stays under the SEC's jurisdiction, allowing them oversight and control. And they create a taxable event.
- In-kind: by using this redemption method the investor receives the asset (Bitcoin) himself. The fund sends the Bitcoin to the investor. The fund doesn't sell any Bitcoin on the open market, yet entrusts the investors to understand the risks associated with holding the Bitcoin themselves. For some investors this is inconvenient, however, the impact on the market is smaller, due to less selling pressure. When applying this methodology the SEC has no jurisdiction and no taxable event is created either.
Known consequences - or paranoide thinking?
If you understand the gold ETF market, then you also know that many people own the same ounce of gold, as the asset is being transferred around, in a paper form, which is highly influenceable by big banks who need to control the gold market. There simply isn't enough gold to redeem all the owners if a run on gold would happen. This is a proven fact, yet has never been solved.
I ask myself how we will be able to control whether the ETF Trustees (Blackrock, Fidelity,...) hold all the Bitcoin they claim when they never physically send it to their rightful owner: the investor, when he redeems. Will they manufacture a system whereby they sell you Bitcoin they don't own themselves to control the market? After all, the Bitcoin doesn't move: only the cash, the USD does.
This story is a first about this dilemma. I would love to read other people's thoughts on this matter, for a deeper understanding.
The SEC has demanded an in-cash redemption when investors want to sell their trust holdings. Arguably there's some logic to it: under this structure, the whole Spot Bitcoin ETF ecosystem remains under their full jurisdiction and control. By allowing a model that keeps Bitcoin securely stored with custodians, and only moving cash around, Bitcoin doesn't become as much of a competitor to the USD, and the asset is contained.
Furthermore, the SEC has gone in baby steps with the ETFs, from futures to in-cash to possibly in-kind when they feel comfortable with brokers touching the Bitcoin asset.
Despite all that, institutional interest is required to grow the industry: retail has done its job by now. Enter the big money!
