Finance Professor Criticizes SEC’s Potential Cash-Only Rule for Spot Bitcoin ETFs, Advocates for In-Kind Model
A finance professor at Georgetown University has voiced his concerns over the U.S. Securities and Exchange Commission’s (SEC) proposal to implement a cash-only creation and redemption process for spot bitcoin exchange-traded funds (ETFs). In a letter to the SEC, the professor argued that the cash-only method would be suboptimal and urged the regulator to consider the benefits of an in-kind creation model.
According to the professor, allowing only cash creation and redemption would limit the freedom of issuers and authorized participants (APs) to choose whether to create or redeem in-kind. This, in turn, could result in costly frictions during the creation and redemption process, leading to wider bid-ask spreads and mispricing of the ETF relative to the spot price. Ultimately, this would increase costs and mispricing risk for investors.
In contrast, the professor highlighted the advantages of an in-kind creation and redemption process. By eliminating trading costs and execution risks, the ETF and its shareholders would benefit from lower costs. Additionally, an in-kind model offers greater resistance to market manipulation, reduces the risks of operating events, and provides simplicity.
The professor emphasized that the SEC should listen to the expertise of ETF sponsors, such as Blackrock and Fidelity, who have advocated for the in-kind model. Both companies have outlined the advantages of this method, including lower transaction costs and improved resistance to market manipulation.
In conclusion, the professor urged the SEC not to squander the positive development of allowing spot bitcoin ETFs to trade in the U.S. Instead, the regulator should embrace the in-kind creation model to ensure optimal products are brought to market.