The proposed SEC requirement for potential spot Bitcoin-ETF regarding the form of issuance and redemption will make these products less efficient, according to venture investor Nic Carter and BitMEX experts.
The real world consequence of this is that ETFs will be less efficient because creation redemption will be more expensive. Not sure if that means tracking error or higher expense ratio but either way more expensive
— nic ? carter (@nic__carter) December 27, 2023
The community drew attention to Grayscale Investments’ updated filing, which included a clause on redeeming the underlying asset and cash-only redemption of fund shares.
Grayscale finally surrendering to cash-only creations, was a big holdout. Pretty sure they have an AP agreement (a crucial last step) so that would check all the boxes. That said, still a mystery whether they will be allowed to go on day one of the Cointucky Derby https://t.co/Wm7TfD3zkP
— Eric Balchunas (@EricBalchunas) December 26, 2023
According to Bloomberg market analyst Eric Balchunas, the firm had fought hard against the introduction of this rule. His colleague James Seiffart wrote that Grayscale appears to have ‘bowed’.
Scott Johnsson, a lawyer specialising in finance, questioned whether fulfilling the SEC’s requirement would in any way improve investor protection, contrary to regulators’ arguments. All existing commodity spot ETFs operate on the in-kind model, and thus departing from it would introduce a new risk factor, he noted.
Grayscale’s amended S-3 gives a nice little background on the key sticking point for in-kind creation/redemption. The SEC promulgated rulemaking for digital asset safekeeping. Despite the fact that BDs and exchanges apparently believe they could comply with the rule and offer… pic.twitter.com/SdudYdsgoR
— Scott Johnsson (@SGJohnsson) December 27, 2023
“The real consequence of this is that ETFs will be less efficient because creation and redemption will be more expensive. I’m not sure whether this means tracking error or a higher expense ratio, but in any case — more expensive,” Carter commented on Johnson’s tweet.
According to a founder-partner of Castle Island Ventures, BitMEX Research analysts echoed that calculations conducted in cash-only terms would prevent market participants from earning profits on premiums or discounts through dealings in the underlying asset and the fund’s shares. This means losing many of the advantages of the exchange-traded product structure and a large portion of the competition that makes ETFs efficient, the experts emphasised.
The way ETFs are supposed to work is as follows:
If the ETF is trading at a premium, often caused by more buyers than sellers, the authorised participants (APs) are incentivised to purchase the underlying instruments and deliver them to the issuer to receive new ETF units. The… https://t.co/UyXeRRMJRs
— BitMEX Research (@BitMEXResearch) December 27, 2023
“It is crucial that there be several competing access points. This ensures the product can handle large volumes and have a low tracking error,” BitMEX Research said.
In the community predict that the regulator will make a positive decision by January 10, 2024. On television, advertising for future exchange-traded products has already appeared.