BlackRock warned SEC lack of in-kind orders for Bitcoin ETF shares could hurt investors

A novel aspect of the new spot Bitcoin ETFs, as approved by the SEC, is the cash-creation mechanism for issuing and redeeming shares. The ETFs are considered commodity-shares ETFs, yet, as BlackRock points out in its iShares Bitcoin ETF (IBIT) prospectus, “all spot-market commodities other than bitcoin, such as gold and silver, employ in-kind creations and redemptions with the underlying asset.”

In its filings, BlackRock strongly advocated for in-kind orders for shares, but the SEC guided applicants toward a cash-creation model due to the nature of specific regulatory processes. People allowed to buy and sell shares of the trust (Authorized Participants) have to be registered broker-dealers, which means they are officially recognized and must follow certain financial rules. Right now, it’s not clear how these broker-dealers can follow these rules if they’re dealing with Bitcoin directly.

Due to this uncertainty, it’s risky for these broker-dealers to use Bitcoin to buy or sell shares of the trust. The SEC probably would not have allowed a product like this on the stock exchange if it’s unclear how the rules apply. Therefore, all the ETF applications were updated from in-kind to cash-creates in December before approval.

If the “NASDAQ receives the in-kind regulatory approval” to allow buying and selling shares with Bitcoin directly in the future, the ETFs will likely request a change to enable in-kind orders. However, we don’t know when this will happen or if it will happen at all.

BlackRock’s view on the cash creation model for Bitcoin ETFs

This information has been available to investors since the Dec. 19 update to BlackRock’s S1 filing. However, following the successful launch of the Newborn Nine ETFs and billions of dollars in volume, revisiting the world’s largest asset manager’s warning to the SEC concerning cash-creates seems worthwhile. It’s important to note that BlackRock is required to state any material risks in its prospectus, so the inclusion of a potential scenario means it is possible, not probable.

That said, BlackRock does not believe the cash-creation method is efficient, stating that the trust’s current practice of buying and selling shares with cash instead of using Bitcoin directly could cause problems in keeping share prices aligned with Bitcoin’s actual value.

It cautions that this mismatch might happen because cash transactions are more complex and take longer than direct Bitcoin transactions. It…