Fidelity engages with SEC on proposed Bitcoin ETF, highlights importance of physical creation and redemption

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9th December 2023 – (New York) Asset management giant Fidelity recently held a meeting with the Securities and Exchange Commission (SEC) on December 7th regarding its proposed spot bitcoin exchange-traded fund (ETF), as disclosed in a memo on the regulator’s website.

During the meeting, Fidelity presented the SEC with a comprehensive overview titled “Bitcoin ETF Workflows,” which included slides outlining the “In-Kind” creation and redemption models. The presentation emphasized the efficiency of arbitrage and hedging strategies through physical creations.

According to the presentation, “Arbitrage and hedge are more efficient with physical creations.” It further highlighted that self-clearing ETF market-maker firms can facilitate efficient arbitrage by acting as Agency Authorized Participants (AP) for non-self-clearing ETF market-maker firms with Crypto Affiliates. Allowing for physical creation and redemption is considered critical to enhancing trading efficiency and secondary market pricing for all participants.

The price of bitcoin has witnessed a significant surge in recent weeks as the market eagerly awaits the Securities and Exchange Commission’s decision on applications for proposed spot ETFs. Throughout the process, regulators and asset managers have focused on the technical aspects of how these proposed funds would operate if approved.

In an amended filing for VanEck’s proposed spot bitcoin ETF, Bloomberg Intelligence analyst James Seyffart commented, “Create/redeem language includes both in-kind and cash still.” This suggests that market participants are increasingly including both options in their filings, although initial approvals under 19b-4 may only permit cash creations initially.

One key disclosure regarding the workflow is that “Registered Broker Dealer entities do not touch the coin in any workflow,” as noted by Nate Geraci, president of the advisory firm The ETF Store. This particular aspect has evidently been a focal point for the SEC.