A recent statement by Hester Pierce, one of the commissioners of the U.S. Securities and Exchange Commission (SEC), that repayment in kind for cryptocurrency exchange-traded funds (ETFs) "just around the corner" has attracted the attention of investors and analysts around the world. This statement fueled discussions around the possibilities and limitations that may arise when the rules for bitcoin ETFs, in particular, change.
What is repayment in kind?
Before delving into Pierce's comments, let's take a look at what "repayment in kind" means. In the context of ETFs, this means that investors can receive assets (such as bitcoins), rather than money, when withdrawing funds. In the case of cryptocurrencies, this would be a significant change from the current practice, when investors receive fiat money (for example, dollars) instead of bitcoins.
Companies like BlackRock have been lobbying for the SEC to allow in-kind repayment for their bitcoin ETFs for a long time. They believe that this will improve liquidity and allow for more efficient trading of such funds. At the moment, when an investor decides to withdraw their funds, the funds must buy bitcoins, sell them on the market and transfer the equivalent in fiat money.
Why is this important?
Allowing in-kind repayment will open up new opportunities for crypto ETFs. The current model, which requires the exchange of bitcoins for cash, limits the flexibility of funds and may create additional risks. Analysts such as James Seyfarth of Bloomberg Intelligence argue that this will allow funds to trade much more efficiently, as they will be able to directly manipulate assets rather than dealing with the intermediate steps of exchanging for money.
Why is the SEC delaying the decision for so long?
The main reason why the SEC has not yet allowed repayment in kind is due to concerns about the volatility of cryptocurrencies and the threat to investors. However, with the development of the market and increased interest from major players such as BlackRock, the SEC's attention is shifting towards changing approaches. Pierce confirmed that changes can be expected on the horizon, and this is likely to happen, but the timing remains uncertain.
How does this relate to the political situation?
Interestingly, the SEC's position on cryptocurrencies has changed with the arrival of new administrations. Under the Trump administration, the regulator was more loyal to cryptocurrency initiatives than under the Biden administration. After the change of government, companies seeking to create and launch cryptocurrency ETFs began to face more stringent requirements and questions from the SEC.
According to analysts, the likelihood that the SEC will approve such applications in the future is growing every year. Some experts even estimate the probability of approval of a crypto-ETF at 90% or higher.
What does this mean for cryptocurrencies?
If the SEC does allow in-kind repayment for crypto ETFs, it could be an important step in integrating cryptocurrencies into traditional financial markets. Investors will not only be able to buy and sell bitcoins through ETFs, but also be able to receive the cryptocurrency itself when withdrawing funds. This, in turn, can contribute to deeper liquidity and stability of the cryptocurrency market.
A question to ponder
However, one important question remains: What do you think is needed for the SEC to definitively resolve such a model, and how will this affect the future of cryptocurrency ETFs?