As the final moments approach, the U.S. Securities and Exchange Commission (SEC) has put forward two new conditions for the approval of the Bitcoin spot exchange-traded fund (ETF).
First, the applicant needs the ETF to be created with cash and removes the implication of deleting all physical redemptions; second, the SEC has made an important change in the required S-1 document, adding the "AP Agreement" column to the latest snapshot of its "ETF Cointucky Derby". This change stems from the SEC's hope to confirm the detailed information of the authorized participants (underwriters) in the next S-1 document update.
The SEC has asked spot ETF issuers to submit revised documents before the weekend (December 31st, US time), and many people speculate that this may be in preparation for approval around January 10th.
So far, the SEC has held 24 meetings with various ETF applicants, and held new meetings with BlackRock, Valkyrie, and Grayscale before this Saturday. This also means that the two new conditions were discussed in multiple meetings. The last two conditions at the expected approval time of January 10 can be said to be the final push. So what do these two conditions mean? Are they difficult to achieve?
Cash creation vs physical creation
The SEC has discussed the creation/redemption model with various issuers many times. The creation of an ETF is the process of selling new ETF shares to investors on behalf of the issuer. It is mainly divided into two methods: cash creation and physical creation. The cash creation method authorizes participants to provide cash to the ETF to purchase the assets (bitcoin) that make up the index tracked by the ETF, and issues ETF shares of corresponding value to investors. The physical creation method involves investors directly providing stocks or other assets that track the index in exchange for ETF shares of equal value.
In the next meeting between Grayscale and the SEC, when discussing GBTC, Grayscale still insisted on fighting for physical methods (subscription and redemption). Bloomberg analyst James Seyffart also said, "I almost completely stand on the side of Grayscale, BlackRock and other issuers who have or are promoting physical methods. This is a simpler and more efficient way to run ETFs."
Authorized Participants
Authorized participants of ETFs are large institutional investors, such as investment banks or brokerage firms, that are authorized by a specific ETF to trade directly with the ETF. For example, institutions such as Morgan Stanley and Goldman Sachs, as APs, can directly engage in cash creation with ETF management companies, that is, provide cash in exchange for newly issued ETF shares.
According to analysts, the SEC hopes to have issuers confirm the AP list and list it in updated documents within the next 10 days. This time frame may not be completed for some issuers, and they may not be able to catch up with potential approval in early January.
However, Bloomberg ETF analyst Eric Balchunas wrote on the X platform that "confirmation of AP agreement" plus "cash creation" may equal "approval", but completing this step is not easy and may be too time-consuming, which may prevent some issuers from being approved at the same time in early January.
latest progress
Several issuers have submitted revised S-1 documents, including BlackRock, Hashdex, and PandoAsset. All three companies have proposed revised plans for Bitcoin spot ETFs. Hashdex selected BitGo as its custody partner; PandoAsset's revised documents are somewhat confusing because it mentions that cash may be needed to create an ETF, but still retains the possibility of using physical assets.
It is worth noting that BlackRock submitted a revised S-1 document to the SEC, clearly stating that it will adopt the "cash subscription/redemption" model preferred by the SEC, which means that AP will not directly handle Bitcoin, but will use cash to create and redeem shares.
As early as December 4, BlackRock had raised $100,000 in seed funding for its planned Bitcoin spot ETF. At the time, although the amount was not large, it was enough to show that the project was moving forward.
In the latest S-1 filing, BlackRock plans to take further action on January 3 and will inject $10 million in seed capital into its ETF, a significant increase from the previously disclosed $100,000. Interestingly, BlackRock's choice of January 3 seems to be a joke, because this day happens to be the anniversary of the birth of the Bitcoin Genesis Block.
Summarize
AP agreement + cash creation, these two steps may be the last steps before approval. At present, BlackRock seems to be determined to win and has made all preparations. However, other applicants are stuck at the "AP agreement" step in the short term and may not be approved in January. Of course, it is not ruled out that the SEC will hold another meeting to propose new requirements, and the latest progress of the Bitcoin spot ETF still needs to be followed up.
