BlackRock Bitcoin ETF Shifts Risk to Crypto Market Makers, Not Banks – Decrypt

BlackRock aims to facilitate the participation of Wall Street banks in its Bitcoin ETF(if approved) transferring the risk to crypto market makers.

The plan includes a novel way to redeem ETF shares, according to a memorandum The SEC shared about a meeting in late November between BlackRock, Nasdaq and the Commission. The parties met last month to discuss feedback on the asset manager's strategy. bitcoin ETF application.

A Bitcoin ETF would allow fund investors to gain exposure to bitcoin without directly purchasing or storing the asset—It has eluded the US market for over a decade, and most analysts expect such a product to generate a large influx of capital into crypto markets. However, the SEC has been reluctant to approve one, given its concerns about manipulation in the Bitcoin markets.

The SEC has not yet made a decision on BlackRock's iShares Bitcoin Trust (IBTC) app and, technically, you don't have to do it until January 15. But analysts have said the regulator is likely to issue a decision on a a handful of existing Bitcoin ETF spot applications earlier this month, between Monday, January 8 and Wednesday, January 10.

The BlackRock-Nasdaq-SEC meeting was a follow-up to a Nov. 20 meeting during which the securities regulator raised some concerns about BlackRock's model for stock redemptions.

A preliminary draft proposal T+1 Settlement That would start with a stockbroker delivering IBTC shares to a transfer agent, the issuer asking the custodian (in this case, Coinbase Custody) to send Bitcoin backing those stocks to a cryptocurrency market maker, and the market maker closed a short position in Bitcoin.

For context: The T is an abbreviation for the date an order is placed. So a T swap flow means that an order is settled on the same day it is placed. And with a T+1 swap, an order placed on Monday is settled on Tuesday. As is often the case in traditional finance, the only eligible days are those when the markets are open. That means weekends don't count and an order placed on Friday can be settled the following week.

The T+1 flow is timely because the SEC recently approved new rules that would require all stock and ETF settlement to occur within one business day. The change will take effect at the end of May 2024.

BlackRock's new settlement flow would mean that redemption orders would begin with cryptocurrency market makers sending cash to the broker-dealer to initiate settlement before authorized participants (the big Wall Street banks) get involved. The revised model closes an important gap.

BlackRock didn't explicitly explain how, but said the new flow offers "superior resistance to market manipulation," a nod to the SEC's main concern about the product. The asset manager also said the flow will create “simplicity and harmonization across the ecosystem.”

Many large financial institutions have to use third-party companies to custody digital assets on their behalf or on behalf of their clients. That means that the need to initiate the exchange flow with BTC would have required them to first go through a third-party custodian.

Making the redemption of shares of large institutions (which manage billions worth of assets for their clients) faster and less risky would likely mean that more of those institutional dollars would flow into the Bitcoin ETF.

Edited by Guillermo Jimenez.