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

BlackRock intends to make it easier for Wall Street banks to participate in its Bitcoin ETF—should it be approved—by shifting risk to crypto market makers.

The plan includes a novel way for shares in the ETF to be redeemed, according to a memo the SEC shared about a late November meeting between BlackRock, Nasdaq, and the Commission. The parties met last month to discuss feedback on the asset manager’s Bitcoin ETF application.

A Bitcoin ETF would enable investors in the fund to gain exposure to Bitcoin without directly buying or storing the asset—it’s eluded the U.S. market for over a decade, and most analysts expect that such a product would lead to a large influx of capital into crypto markets. The SEC has been reluctant to approve one, however, given its concerns about manipulation in Bitcoin markets.

The SEC hasn’t yet made a decision on BlackRock’s iShares Bitcoin Trust (IBTC) application and, technically, doesn’t have to until January 15. But analysts have said it’s likely that the regulator will issue a decision on a handful of the existing spot Bitcoin ETF applications earlier in the month, between Monday, January 8 and Wednesday, January 10.

The BlackRock-Nasdaq-SEC meeting was a follow-up to a November 20 meeting during which the securities regulator expressed some concerns over BlackRock’s model for the redemption of shares.

A previous proposal outlined T+1 settlement that would begin with a broker dealer delivering IBTC shares to a transfer agent, the issuer asking the custodian (in this case, Coinbase Custody) to send Bitcoin that was backing those shares to a crypto market maker, and the market maker closing a short position in Bitcoin.

For context: The T is shorthand for the date an order is placed. So a T redemption flow means an order is settled the same day that it’s placed. And with a T+1 redemption, an order placed on Monday is settled on Tuesday. As is usually the case in traditional finance, the only eligible days are the ones when 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 goes into effect late May 2024.

The new settlement flow from BlackRock would mean that redemption orders would begin with crypto market makers sending cash to the broker dealer to kick off settlement before authorized participants—big Wall Street banks—ever get involved. The revised model bridges an important gap.

BlackRock didn’t explicitly spell out how but said the new flow offers “superior resistance to market manipulation”—a nod to the SEC’s primary concern over 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 firms to custody digital assets on their or their clients’ behalf. That means needing to start the redemption flow with BTC would have required them to first go through an outside custodian.

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

Edited by Guillermo Jimenez.