The United States Securities and Exchange Commission (SEC) has taken a significant step in addressing concerns over market manipulation in the potential approval of a spot Bitcoin (BTC) exchange-traded fund (ETF).
This move involves adopting a cash creation and redemption mechanism, a departure from the traditional in-kind model used for ETFs based on stocks and commodities. The decision has been made to safeguard against intraday price manipulation, and it has gained traction among major asset managers, including Hashdex, BlackRock, ARK Invest, and Grayscale.
Cash creation and redemption mechanism explained
The cash creation and redemption mechanism for spot Bitcoin ETFs entail that new shares of the ETF can only be created or redeemed through cash transactions. Unlike traditional ETFs, where market participants handle the underlying assets directly, this mechanism reduces the potential for market manipulation, especially in the highly volatile cryptocurrency market. It is seen as a proactive step by the SEC to ensure the integrity of the ETF market.
The cash creation and redemption mechanism concept was initially proposed by Hashdex, one of the asset managers seeking regulatory approval for a Bitcoin ETF. Hashdex’s original filing from August outlined the need for such a mechanism to prevent intraday price manipulation. The SEC well-received the idea, prompting other major asset managers to follow suit.
Among the notable asset managers embracing this mechanism are BlackRock, ARK Invest, and Grayscale. These firms have incorporated the cash creation and redemption mechanism into their ETF applications, signaling a consensus within the industry on its effectiveness in addressing market manipulation concerns.
Potential future regulatory steps
While some speculators have suggested that the SEC may require a regulated market of significant size, possibly involving the inclusion of the Chicago Mercantile Exchange for physical transactions, it remains uncertain whether such measures will be implemented.
The SEC’s recent meeting with ETF applicants set a deadline of December 29 for filing final S-1 amendments, with a warning that late submissions would not be considered for the January batch of potential approvals. This deadline highlights the SEC’s commitment to streamlining the approval process for Bitcoin ETFs.
In a notable development, Barry Silbert, CEO of Digital Currency Group, announced his resignation from Grayscale’s board of directors. Grayscale, a prominent crypto asset manager, has recently lodged an amended S-3 filing with the SEC.
Some market commentators speculate that Silbert’s departure could have significant implications for Grayscale’s ongoing efforts to convert its Grayscale Bitcoin Trust (GBTC) into a spot Bitcoin ETF, a decision currently pending SEC approval.
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