BlackRock is challenging the SEC on a spot Bitcoin ETF with Ark

The agency recently expressed a preference for cash-redeemed ETFs, but ETF issuers believe the spot model is more suitable for the market.

Investment managers BlackRock and Ark Invest have favored the launch of bitcoin exchange-traded funds (ETFs) using spot issuance and redemptions, ignoring guidance from the U.S. Securities and Exchange Commission (SEC) last week recommending a shift to a cash model.

BlackRock recently met with SEC staff to brief regulators on how the spot and cash redemption models apply to Bitcoin ETFs. According to a presentation reviewed by James Sayffart, an analyst at Bloomberg ETFs, BlackRock prefers the spot model.

Bloomberg ETF analyst Eric Balchunas said that last week, the SEC advised Bitcoin ETF issuers to update their filings to use cash issuances instead of spot offerings.

However, this week Ark Invest and its founder, Cathie Wood, filed an application for an update of a spot Bitcoin ETF that defies the SEC’s advice on the use of cash creation. Despite the SEC’s advice, Ark appears to be sticking to spot creation and redemption.

The U.S. Securities and Exchange Commission has long expressed concerns about potential manipulation and illiquidity in the Bitcoin market. Requiring cash creation is seen as a way to mitigate some of these risks.

In spot redemptions, the redeemer is usually a market maker who will receive bitcoin directly from the fund in exchange for shares, minimizing the impact on the market price of bitcoin. However, for cash redemptions, the ETF needs to sell Bitcoin in the market to get the cash needed to pay the redeeming party.

Spot trading is also favored by ETF providers due to their tax efficiency, as they can avoid capital gains taxes that may arise when selling cash in Bitcoin.