As the clock ticks down to the January deadline for the Securities and Exchange Commission to approve, deny, or delay its decision on spot Bitcoin ETFs, there’s one last hurdle for potential issuers: Authorized participants.
Bloomberg Intelligence analyst Eric Balchunas predicted that each Bitcoin ETF hopeful will need to have explicit authorized participant parameters in its S-1 before it’s considered for approval.
“This is no easy last step, and may keep some from [the] starting gate,” Balchunas said Friday on Twitter. He went on to hypothesize that, “AP agreement + cash creates = approval.”
Latest snapshot of The ETF Cointucky Derby w new column for "AP Agreement" as SEC wants AP (who is also underwriter) named in next S-1 update (coming in next 10 days). This is no easy last step, and may keep some from starting gate. AP agreement + cash creates = approval @JSeyff pic.twitter.com/e8cgCuUBLN
— Eric Balchunas (@EricBalchunas) December 22, 2023
The authorized participant wrinkle appears to be another attempt by the SEC to very explicitly spell out who can and who cannot be involved in the creation and redemption of Bitcoin ETF shares—and by extension, who can directly handle BTC.
By definition, an authorized participant is an organization—other than the issuer themselves—that’s allowed to create and redeem shares of an ETF. Normally it’s large banks and financial institutions that take on that role.
And generally speaking, the more authorized participants there are for an ETF, the more liquidity there is. When there’s a shortage of shares on the market, authorized participants can create more. And when there’s too many shares of the ETF on the market, authorized participants can reduce the number of shares available. In both instances, the extra participants help keep an ETF’s share price in line with its underlying asset—in this case, that’s Bitcoin.
A spot Bitcoin ETF is a product the industry has wanted approved for U.S. investors for more than a decade. But the SEC has been steadfast in saying that there were too many risks to allow investors access to one. Chief among those risks: Market manipulation and reliable price discovery.
In a screenshot, Balchunas showed a table tracking the status of the Bitcoin ETF hopefuls. Of them, half still allow for the creation of shares with cash or in-kind. But as the Bloomberg analyst has said himself, in-kind share creation is a non-starter for the SEC.
“The SEC just was not going to be comfortable enough with in-kind because it allows registered brokers to use Bitcoin and that’s not allowed,” he said on a webinar earlier this week. “I don’t think they want any unregistered subsidiaries to touch Bitcoin. Cash creation solves that—it means the issuer basically touches the Bitcoin and no one else.”
The last two months have been rife with meetings and phone calls between regulators and potential issuers like Grayscale, Valkyrie, and BlackRock. At this point, say many speculators, it’d be highly unlikely that the SEC has put this much work into helping applicants finetune their S-1 filings if it weren’t with the aim of eventually approving at least some of them.
At present, there’s more than a dozen Bitcoin ETF hopefuls with applications under consideration with the U.S. regulator. Although firms have been trying to get one approved since 2013, the anticipation ratcheted up in June when Wall Street behemoth BlackRock tossed its hat in the ring with its iShares Bitcoin Trust.
BlackRock’s S-1 filing has gotten three amendments since it was filed, the latest of which explicitly spelled out that the ETF would only allow the creation of shares with cash and switched the fund’s ticker from IBTC to IBIT. If it’s approved, the ETF will trade on the Nasdaq.
Edited by Guillermo Jimenez.