News source: Chain News ABMedia
Original author: Florence
Asset management giant Fidelity recently met with the SEC's Division of Trading and Markets to discuss their physical creation and redemption design, and subsequently proposed a second S-1 amendment. BlackRock previously proposed a similar physical model. What is the key to the US Securities and Exchange Commission (SEC)'s delay in approving a Bitcoin spot ETF?
Fidelity Bitcoin Spot ETF Flowchart
Fidelity met with SEC officials to discuss a recent Bitcoin spot ETF process map, stating in its filing:
Arbitrage and hedging are more efficient through physical creation. ETF (self-clearing) market makers with clearing mechanisms can act as proxy APs for non-clearing ETF market makers with cryptocurrency affiliates, facilitating efficient arbitrage. Allowing physical creation and redemption is critical to improving trading efficiency and secondary market pricing for all participants.
From the figure below, we can see that the purple frame represents the market maker with a clearing mechanism (self-clearing). Its role as AP (Authorized Participants) represents a registered broker-dealer and cannot directly access physical Bitcoin.
The red box indicates that market makers without a clearing mechanism (non-self clearing), which represent non-registered broker dealers, can access physical Bitcoin.
Nate Geraci, president of advisory firm The ETF Store, wrote on X:
The key to this workflow is that the registered broker-dealer entity will not touch the tokens in any workflow. This is obviously a concern of the SEC.
BlackRock's physical model has a similar effect
Earlier, BlackRock also met with the SEC to discuss the physical ETF model again. At that time, Bloomberg ETF analyst Eric Balchunas believed that the biggest difference was:
The offshore entity market maker obtains Bitcoin from Coinbase and then advances cash to the U.S. registered broker-dealer. This means that the U.S. registered broker-dealer is not allowed to touch Bitcoin.
We also use the red box to indicate that only market makers who are not registered broker-dealers can access physical Bitcoin.
This is consistent with our previous speculation that the SEC hopes to limit the list of companies that can trade spot Bitcoin. After all, market manipulation has always been the main reason why the SEC is reluctant to approve spot Bitcoin ETFs.
Are traditional finance and the crypto industry adequately prepared?
As Fidelity and the U.S. Securities and Exchange Commission delve into technical details, the price of Bitcoin has risen again. The next approval window for most Bitcoin spot ETFs falls around January 10, 2024. The recent intensive meetings between asset management companies and the SEC and the continuous updating of proposals have also deepened the market's optimism.
These back-and-forth discussions involve potential game-changing changes in the cryptocurrency space. The complex details of ETF operation procedures and their impact on the market also reflect whether a mature industry is ready for major evolution.
