Rather than the in-kind model for its spot Bitcoin exchange-traded fund (ETF), Grayscale Investments has opted for the cash model for its investment product.
However, the crypto asset manager did issue warnings about the adverse consequences of this model change.
It said that a spot bitcoin ETF that only uses cash creations and redemptions without in-kind creations and redemptions is a product that has not been tested as yet.
The company said in its filing with the US Securities and Exchange Commission (SEC) that operational inefficiencies could have an impact.
The amendment
On December 26th, Grayscale Investments submitted its second amendment to Form S-3 i.e. its registration statement for GBTC (Grayscale Bitcoin Trust) with the SEC.
The crypto asset manager detailed how the cash creation method would be used by its spot bitcoin ETF, rather than the in-kind model.
The filing said that the trust could currently accept cash orders. It added that the in-kind model could not be currently used for creating and redeeming shares with authorized participants.
The filing also highlighted that no definitive regulatory guidance had been provided about how and whether registered broker-dealers can deal with and hold Bitcoin in accordance with federal securities laws.
The conversion
Grayscale is interested in converting its Grayscale Bitcoin Trust (GBTC) into a spot bitcoin ETF. Initially, the firm’s filing had been rejected by the SEC.
However, the asset manager challenged the decision of the SEC and a court ordered the securities regulator to reassess its decision.
Many spot bitcoin ETF applicants, which include the world’s largest asset manager BlackRock and Grayscale, have pushed to adopt the in-kind model for the investment product.
However, reports indicate that the SEC has insisted on the use of the cash creation model instead of the in-kind model.
The details
In its filing, Grayscale asserted that the trust could suffer from adverse consequences due to the inability to facilitate in-kind redemptions and creations.
It said that ETFs for all spot-market commodities excluding bitcoin, such as silver and gold, use in-kind redemptions and creations with the underlying asset.
Grayscale asserted that it considers this more efficient, which means it costs less to utilize in-kind orders, as compared to cash orders.
According to Grayscale, this is because the process has fewer steps due to which there is less operational risk. After all, the buying and selling of the underlying asset is managed by the authorized participant.
This means that there is no dependence on an unaffiliated party like a sponsor, or an issuer. Plus, Grayscale also mentioned in the filing that using a cash creation and redemption model would be a first.
It has not been used for a spot bitcoin ETF before and resulting operational inefficiencies could have an impact on it.
It added that the arbitrage mechanism could fail to operate efficiently in the absence of the in-kind redemption and creation model.
Therefore, the shares could end up trading at a discount, or premium to the NAV per share and these could be quite substantial.