In a pivotal move towards integrating cryptocurrency into traditional financial markets, asset management giant Fidelity met with the Securities and Exchange Commission (SEC) on December 7 to discuss its proposed spot Bitcoin exchange-traded fund (ETF).
As disclosed on the regulator’s website, the meeting brought together representatives from Fidelity, including Shelley Harding, Cynthia Lo Bessette, and others, with participants from the SEC’s Division of Trading and Markets and Division of Corporation Finance.
During the session, Fidelity presented a comprehensive overview titled “Bitcoin ETF Workflows,” shedding light on the intricacies of “In-Kind” creation and redemption models. The discussion addressed various aspects of the ETF, fostering a collaborative dialogue between industry stakeholders and regulatory authorities.
One key element highlighted in Fidelity’s presentation was the efficiency of arbitrage and hedge through physical creations. The outlined models emphasized the role of Authorized Participants (AP), Registered Broker-Dealers, and ETF Market Makers in facilitating the creation and redemption of ETF shares. The presentation underscored the significance of physical creation and redemption mechanisms in enhancing trading efficiency and secondary market pricing for all participants.
Bitcoin ETF: In-Kind Create and In-Kind Redeem Models
The proposed workflow detailed the roles and responsibilities of entities involved, such as APs acting as Agencies for non-self-clearing ETF market maker firms with Crypto Affiliates. The process included in-kind creation and redemption steps involving trade dates, settlement dates, and the crucial role of various entities like Transfer Agents, ETF Custodians, and Crypto Affiliates.
For in-kind creation, the process involved the ETF Market Maker requesting an AP to facilitate the creation of ETF shares, with the subsequent delivery of the required Bitcoin to the ETF Bitcoin Custodian. On the settlement date, the ETF Custodian released the ETF shares to the AP, acting as an agency, for onward delivery to the ETF Market Maker Broker-Dealer.
Conversely, the in-kind redemption process entailed the ETF Market Maker requesting an AP to facilitate the redemption of ETF shares, ultimately leading to the delivery of ETF shares to the ETF Custodian’s account at the Depository Trust Company (DTC). The intricate steps involved in both creation and redemption underscored the meticulous planning required for the successful integration of a spot Bitcoin ETF into the market.
Nevertheless, Fidelity’s proactive engagement with the SEC and the detailed presentation on Bitcoin ETF workflows underscores the industry’s commitment to navigating the regulatory landscape and establishing a robust framework for cryptocurrency exchange-traded funds.
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