The Securities and Exchange Commission and some large investment companies like BlackRock and Fidelity are working out the small details for a potential bitcoin exchange-traded fund (ETF). This could mean that the agency is getting close to deciding whether to allow this type of investment.
Companies have talked with the government agency recently to figure out how a bitcoin investment fund would work. The government is still checking everything and deciding if they will allow it, said Vivian Fang, a finance professor at Indiana University.
BlackRock workers talked to the agency on November. Fang talked about iShares Bitcoin Trust and proposed a new plan that would give the company more options if investors want to trade in their shares for the actual asset.
During an interview, Fang explained the possible ways a spot bitcoin ETF could be set up, using a comparison to a basket of eggs. The problem is about figuring out who would have to sell bitcoin if someone wanted to cash out. Fang said that no matter what type of shares they have, investors will still get money back when they sell them.
Model where goods or services are exchanged for something else instead of money.
Asset managers know a lot about something called an “in-kind” redemption model. This is used a lot by stock-based ETFs. In that plan, regular investors who want to sell their shares would get bitcoin from BlackRock instead, and then they can trade it for cash through a broker.
On the other hand, the SEC probably prefers a cash model. This would mean BlackRock has to take the bitcoin out of storage, sell it immediately, and return the cash to the investor.
Fidelity has also shown signs of following a model that would stick to exchanging shares instead of giving cash, according to a memo about its recent meeting with the SEC.
“Fang said that asset managers know about a type of model that has low risk. ”
The models are different based on how much risk BlackRock or any other company is okay with taking.
For instance, if a person has 100 eggs and other people want them back, they don’t want to take the risk of changing the eggs into something else.
Fang said, “I will give you back your egg when you want it, even if it’s worth $5 or $10. I have your egg and will give it to you. ”
The new version
During the November meeting, BlackRock explained a new plan that would let them keep their bitcoin even if people asked for their money back. It would also help reduce the negative effects of a lot of people selling their shares of the ETF at once, and give them more freedom in managing their investments without having to pay taxes on the profits.
Fang explained that the only difference is that in the cash model, you have to sell bitcoin to get cash. “In the new way of doing things, I’m giving you money instead of bitcoin. You don’t need to be concerned about how I got the money, but I’m giving it to you right now. ” You let me handle the selling.
Fang said the new model might make the SEC happy. Investors see no difference between the cash model and the new in-kind model.
“Fang said they don’t want investors to reach a point where they need to sell their assets for money but are not able to do so. ”
BlackRock and Fidelity chose not to say anything. The SEC did not answer when asked for a comment.