A modification to the proposed structure of spot bitcoin exchange-traded funds (ETFs) by BlackRock is set to permit authorized participants (APs) to create new shares using cash instead of exclusively relying on cryptocurrency. This adjustment opens opportunities for Wall Street banks, which are restricted from directly holding cryptocurrencies.
The adjustment in the mechanics of BlackRock’s proposed spot bitcoin (BTC) ETF now allows authorized participants, a crucial component of the ETF ecosystem, to generate new fund shares using cash instead of solely cryptocurrency. This modification provides an avenue for highly regulated U.S. banks, such as JPMorgan or Goldman Sachs, which are constrained from holding bitcoin, to act as authorized participants for BlackRock’s ETF (whether they choose to do so is a separate consideration).
In this process, the cash used by authorized participants can be converted into bitcoin by an intermediary and stored by the ETF’s custody provider. This change in approach was outlined in a memo filing related to a November 28 meeting involving the U.S. Securities and Exchange Commission, BlackRock, and Nasdaq.
There is growing optimism that the Securities and Exchange Commission (SEC) will soon approve spot bitcoin ETFs, potentially transforming the digital assets industry by attracting substantial investment from retail investors. Previously, the expectation was that authorized participants would be large market-making firms experienced in crypto, such as Jane Street, Jump Trading, and Virtu—not banks. However, with this alteration, banks may enter the scene, expanding the pool of liquidity providers.
CF Benchmarks CEO Sui Chung commented in an interview, “If the SEC accepts this revised, dual model of create and redeem with cash and physical, that means the liquidity that supports the ETF shares when they trade would be increased because obviously, you have more potential APs as part of the process. And although trading firms like Jane Street, etc. are large and are experts, they fundamentally don’t have the trillion-dollar plus balance sheets that large American banks have.” (CF Benchmarks is the benchmarks administrator for several existing spot bitcoin ETF applications, including BlackRock’s and is owned by Kraken.)
