It’s nearly guaranteed that regulators will force Bitcoin (BTC) ETF applicants to adopt a “cash-create” model before launching their highly anticipated investment products, according to Bloomberg ETF analyst Eric Balchunas.
The decision, if true, would have major implications for the cost of managing each fund – and by extension, the fees passed down to customers.
In-Kind VS In-Cash
Since last month, BlackRock and other applicants have held multiple meetings with the Securities and Exchange Commission (SEC) concerning their “redemption model” – the process by which their ETF shares will be kept in tandem with the value of the fund’s underlying BTC.
Sponsors like BlackRock have pushed for an ‘In-Kind’ redemption model, by which a registered intermediary transfers Bitcoin (BTC) to the ETF issuer whenever it must issue new fund shares to meet market demand.
By contrast, the SEC seeks a cash-create model, which would require intermediaries to send an ETF issuer cash, which is then used to buy the BTC they need. The added step prevents intermediary broker-dealers from needing to personally handle real BTC, which is a no-no for the regulator.
Yet there’s a cost. As explained by Balchunas in a Thursday post to X:
“Cash creates are worse for taxes bc cash changes hands vs in-kind is simply trade and no cash exchanges hands. Thus, cash create only bitcoin ETFs are not ideal and screw up one major advantage of ETF structure.”
Early Capital Gains Tax
By executing cash-to-BTC conversions on its own, ETF issuers would be subject to capital gains taxes whenever they need to sell their fund’s BTC.
According to fellow Bloomberg analyst James Seyffart, this could make ETF holders forced to recognize gains when they otherwise wouldn’t have needed to yet.
“This is how *all* Mutual Funds work because mutual funds operate on cash create and redeem,” he elaborated. “Should be more of an inconvenience than anything for most people.”
The Grayscale Bitcoin Trust (GBTC) may be most adversely affected by such a change upon conversion to an ETF, since the fund has been holding clients’ BTC for years at vastly lower prices than today.
Balchunas added that cash-create ETFs are likely a “done deal” based on internal chatter and various updated ETF filings from applicants.
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