In recent weeks, the U.S. Securities and Exchange Commission (SEC) has held multiple meetings with financial institutions such as BlackRock and Fidelity, focusing on the technical details of a Bitcoin spot ETF. The companies discussed details of the Bitcoin Spot ETF redemption process with the SEC. Vivian Fang, a professor of finance at Indiana University, believes that the SEC currently appears to be in the review stage and finalizing the details of possible approval. This shows that the SEC’s review of Bitcoin spot ETFs is actively advancing and there may be further progress.
Vivian Fang analyzed the potential structure of Bitcoin spot ETFs and pointed out that the current focus of discussion is cash, physical and revised physical redemption models. These three different redemption modes all serve the purpose of identifying which entities must liquidate Bitcoin upon redemption. No matter which model is adopted, investors can get cash back when they redeem their shares.
Vivian Fang pointed out that asset management companies are very familiar with the physical redemption model because it is a model often used by stock ETFs. Under this model, retail investors who wish to redeem their shares can obtain their Bitcoin shares from BlackRock and convert them into cash through a broker-dealer. This model provides investors with a convenient way to convert their investments to meet their funding needs.
The SEC may prefer a cash redemption model, requiring BlackRock to resell Bitcoin and return cash to investors. Fidelity also supports this mode in Notes. The difference is whether the issuer is willing to take the risk.
Vivian Fang explained that if an asset management company holds 100 eggs and investors want all the eggs back, the asset management company will not bear the conversion risk. Their approach is to return eggs one by one based on investor requests. There is no immediate concern about the current price of eggs; it might be $5 or it might be $10. As asset management companies, they simply hold an egg on behalf of investors and return it when investors need it.
In the meeting with the SEC, BlackRock proposed a revised physical redemption model. Under this model, asset managers do not need to immediately liquidate Bitcoin holdings to meet redemption needs, thereby reducing the impact of large-scale collective redemptions of ETFs. This model also allows greater flexibility in portfolio management without triggering capital gains taxes.
Vivian Fang explained: The only difference is that under the cash redemption model, investors need to sell Bitcoin to obtain cash, while under the revised physical redemption model, the issuer pays cash directly, and investors do not have to Concerned about when and how issuers sell Bitcoin to obtain cash, issuers provide cash now and retain control of selling Bitcoin.
Vivian Fang believes that the revised physical redemption model may be sufficient to meet the SEC’s requirements. From an investor's perspective, there is not much difference in actual effect between the cash redemption model and the revised in-kind redemption model.
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