BlackRock’s Bitcoin ETF Faces SEC Scrutiny Over Third-Party Bitcoin Purchases

The competition in the spot Bitcoin exchange-traded fund (ETF) arena intensifies as BlackRock makes strategic amendments to finalize details, appointing a ‘Prime Execution Agent’ for Bitcoin buying and selling. However, concerns arise over Securities and Exchange Commission (SEC) approval due to potential discomfort with third-party involvement in the cash model.

BlackRock’s Third-Party Move: BlackRock’s latest move involves the appointment of a ‘Prime Execution Agent,’ essentially a third-party broker tasked with buying and selling Bitcoin on behalf of the ETF. The Securities and Exchange Commission may scrutinize this approach, expressing potential discomfort with a third party executing Bitcoin purchases in the cash model.

SEC’s Emphasis on ‘Cash Creates’: Recent communications between the SEC and asset managers reveal the regulator’s emphasis on the ‘cash create’ method for ETF share creation and redemption, favoring it over the ‘in-kind’ method that involves similar assets. This directive comes as the SEC actively engages with exchanges and issuers, reinforcing the importance of the ‘cash create’ approach.

Coinbase’s Potential Role: While BlackRock has not explicitly named the ‘Prime Execution Agent,’ Coinbase is a potential candidate, considering its role as the custodian in the initial filing for the Bitcoin ETF in June. However, the regulatory challenges that Coinbase currently faces, including a lawsuit by the SEC for allegedly operating an unregistered securities exchange, could complicate matters for BlackRock.

Analyst Perspectives: ETF analysts, including James Seyffart and Eric Balchunas, offer insights into the ongoing developments. Seyffart points out issuers amending filings to adopt the ‘cash creates’ model, with Bitwise being the first to make this shift. Balchunas remains optimistic about a January 10 approval, estimating a 90% likelihood, despite the SEC’s emphasis on the ‘cash create’ method.

Outlook and Expectations: Despite potential regulatory hurdles and SEC scrutiny, analysts express confidence in a batch of ETF approvals in early January. The base case scenario envisions approvals between January 8-10, shaping the landscape for Bitcoin ETFs in the coming year.

Conclusion: BlackRock’s strategic move to appoint a ‘Prime Execution Agent’ adds a layer of complexity to the Bitcoin ETF race, with regulatory scrutiny and SEC preferences for the ‘cash create’ method shaping the narrative. As the ETF landscape evolves, market participants closely watch for developments that will define the entry of spot Bitcoin ETFs into the market in early 2023.

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