ETF on the Brink: Dozens of Meetings with the SEC Yield Final Two Conditions Before Approval
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ETF on the Brink: Dozens of Meetings with the SEC Yield Final Two Conditions Before Approval
"Confirming the AP agreement" plus "cash creation" may equal "getting approved."
Navigating Web3 tides with focused insightsBy jk, Odaily Planet Daily
On December 21 local time in the United States, a Fox Business reporter stated that during meetings with ETF applicants, the SEC had proposed new conditions for approving spot Bitcoin ETFs—requiring ETFs to use cash creation and remove all references to in-kind redemption. Following this, several applicants including BlackRock submitted revised S-1 filings.
On December 23, Bloomberg ETF analyst Eric Balchunas posted on X that the latest snapshot of the "ETF Cointucky Derby" has added a new column titled "AP Agreement," as the SEC wants applicants to confirm authorized participant (AP) information in their next S-1 update (within the next 10 days). He noted that this step may be difficult and time-consuming, potentially preventing some issuers from receiving simultaneous approval in early January. However, “confirming AP agreements” plus “cash creation” could equal “approval.”
Meanwhile, both Fox Business and Bloomberg analysts confirmed that the SEC has required spot ETF issuers to submit amended filings by next weekend (December 31 U.S. time), leading many to speculate this is preparation for an approval around January 10.
Previously, according to sources, by the 20th, the SEC had already held 24 meetings with various ETF applicants, and further new meetings were conducted separately with BlackRock, Valkyrie, and Grayscale before Saturday this week. This indicates that these two new requirements resulted from multiple rounds of discussions. As the final hurdles ahead of the anticipated January 10 approval date, they are truly the last push toward the goal.
So what exactly do these two conditions mean? Are they difficult to meet? And will ETFs receive approval as expected on January 10? Let’s take a closer look at the details.
Cash Creation vs. In-Kind Creation
ETF creation refers to the process by which an issuer sells new ETF shares to investors, primarily through two methods: cash creation and in-kind creation. In cash creation, large institutional investors or authorized participants (APs) provide cash to the ETF, and the ETF management company uses these funds to purchase the underlying assets tracked by the ETF (in this case, Bitcoin), then issues corresponding ETF shares. This method is simple, flexible, and easy to understand, especially suitable when the underlying assets are hard to acquire directly. However, Bitcoin does not seem particularly difficult to obtain.
In contrast, in-kind creation involves investors directly providing the securities or other assets that make up the index tracked by the ETF instead of cash. These assets are exchanged directly for equivalent ETF shares, reducing transaction costs. For a Bitcoin ETF, in-kind creation means investors use Bitcoin itself to buy shares of the spot Bitcoin ETF. Both creation methods aim to flexibly adjust the number of ETF shares based on market demand, ensuring the ETF price remains closely aligned with the actual value of its underlying assets.
At this point, readers might wonder: if I already own Bitcoin, why would I need to use Bitcoin to buy a Bitcoin-based ETF? Isn’t it essentially the same thing? There are two reasons.
The first reason isn't directly related to Bitcoin: ETF issuers typically prefer offering in-kind creation because it can be tax-efficient. For example, when buying an ETF composed of stocks A, B, and C, if I hold stock A, exchanging it directly for ETF shares allows me to effectively gain exposure to three companies, achieving diversification and lower risk—all without triggering a taxable event under U.S. tax law since no securities were sold. If I chose cash creation, I’d have to sell my stock A first, incurring capital gains taxes. Therefore, ETF issuers generally offer both cash and in-kind options. But here, the SEC insists that Bitcoin ETF issuers must use only cash creation.
The second reason is highly relevant to Bitcoin: for high-net-worth institutions seeking stability, direct investment in cryptocurrencies may not seem like a prudent choice, especially after last year's series of high-profile collapses. From a credibility standpoint, saying “we invested in a very secure digital currency” is clearly less convincing than stating “we invested in a financial product offered by BlackRock.” This is precisely why ETFs are more appealing to institutional investors than Bitcoin itself.
Since the process involves purchasing ETF shares, some news reports also refer to this as cash subscription. Correspondingly, cash redemption and in-kind redemption refer to the form of payment investors receive when selling their ETF shares.
As previously reported by Odaily, during Grayscale’s renewed meeting with the SEC regarding GBTC matters, Grayscale still insisted on pushing for in-kind creation and redemption mechanisms. Bloomberg analyst James Seyffart said, “I’m almost entirely on the side of Grayscale, BlackRock, and others who have advocated or are advocating for in-kind mechanisms. It’s a simpler, more efficient way to run an ETF.”
Authorized Participants (APs)
Authorized Participants (APs) are large institutional investors—such as investment banks or brokerage firms—authorized by a specific ETF to trade directly with the fund. For instance, institutions like Morgan Stanley and Goldman Sachs, acting as APs, can directly engage in cash creation with the ETF manager by providing cash in exchange for newly issued ETF shares.
According to analysts, the SEC wants issuers to confirm their AP lists and include them in updated filings within the next 10 days. This timeline may be too tight for some issuers to meet, meaning they might miss out on potential approvals in early January.
However, Bloomberg ETF analyst Eric Balchunas also noted that AP agreement + cash creation = approval. In other words, these two steps appear to be the final requirements before approval. Odaily will continue to follow updates on the revised filings submitted before December 31.
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