Finance Professor Blasts SEC’s Potential Cash-Only Rule for Spot Bitcoin ETFs Citing Benefits of In-Kind Model

A finance professor at Georgetown University has urged the U.S. Securities and Exchange Commission (SEC) to avoid micromanaging the creation/redemption process for spot bitcoin exchange-traded funds (ETFs). While the SEC proposed the cash creation method, applicants like Blackrock and Fidelity have advocated for the in-kind creation method. “Now that the Commission has seemingly become comfortable with allowing spot bitcoin ETFs to trade in the U.S., it should not squander this positive development by forcing a suboptimal product (cash-only creation/redemption) to come to market,” said the professor.

Georgetown Professor Urges SEC to Let Spot Bitcoin ETFs Use In-Kind Creation Method

James Angel, an Associate Professor of Finance at Georgetown University, penned a letter to the U.S. Securities and Exchange Commission (SEC) on Tuesday regarding all proposals for spot bitcoin exchange-traded funds (ETFs) that the regulator has received. Professor Angel specializes in the market structure and regulation of global financial markets.

He told the securities watchdog:

Media reports indicate that the long overdue approval of a spot bitcoin ETF is imminent. Getting this done quickly and properly will free up SEC resources to do the other more important things in furtherance of the SEC’s important mission.

However, the professor raised concerns in his letter: “I’ve noticed some reports that the SEC is considering allowing only cash creation/redemption. If the media reports are accurate, that would be a big mistake. Issuers and APs [authorized participants] would not have the freedom to choose whether to create/redeem in-kind. This would impose costly frictions on the create/redeem process, resulting in wider bid-ask spreads and mispricing of an ETF relative to the spot price. This will result in higher costs and mispricing risk to investors.”

Angel explained:

In-kind creation/redemption eliminates trading costs and execution risks for the ETF. With cash creation/redemption, the ETF (and thus the shareholders) suffers the transaction costs of buying and selling bitcoin.

“These costs include the bid-ask spread along with the operational costs from the labor and overhead involved in calculating, executing, monitoring, and accounting for transactions in the various bitcoin markets,” he described. “Costs to ETF shareholders will be lower if the ETF does not have to pay to build a competent trading capacity in bitcoin. Furthermore, there are timing costs involved in the risk that the bitcoin price moves between the time when the NAV is established for a creation/redemption and the time when the bitcoin is traded. Given the high volatility of bitcoin, this is a real risk. There is no reason to force the shareholders to bear this execution risk when it is not necessary.”

Emphasizing that “The SEC should listen to the ETF sponsors that have decades of daily hands-on experience with creating and redeeming ETFs,” the professor stressed:

ETF sponsors should have the freedom to accept bitcoin directly. The SEC should resist the urge to micromanage how ETF sponsors do the creation/redemption process. It should be left to the professional judgment of the ETF sponsors.

Citing Blackrock, the world’s largest asset manager, and financial services giant Fidelity, the professor stated: “Blackrock has pointed out how an in-kind model offers lower transaction costs, superior resistance to market manipulation, reduction in risks of operating events, and simplicity. Fidelity has also pointed out the advantages of the in-kind model.” The world’s largest asset manager has proposed a revised in-kind model for its spot bitcoin ETF.

The professor concluded: “Now that the Commission has seemingly become comfortable with allowing spot bitcoin ETFs to trade in the U.S., it should not squander this positive development by forcing a suboptimal product (cash-only creation/redemption) to come to market.”

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