Unbacked Bitcoin ETFs – the myth is debunked
Unbacked Bitcoin ETFs – the myth is debunked
Bloomberg analyst James Seyffarth confronted the widespread rumors about spot Bitcoin ETFs and decided to clarify where the misunderstanding lies.
In his post on X, Seyffarth analyzes the redemption model of spot BTC ETFs, called "cash create," which is mandated by the U.S. Securities and Exchange Commission (SEC).
Since most funds that have applied for Bitcoin ETFs have complied with the SEC's requirement to create cash, the perception is spreading that the fund will not hold Bitcoins and the Bitcoin ETFs will function as a fractional reserve product.
Seyffarth's clarification sounded absolutely clear: spot Bitcoin ETFs WILL hold Bitcoins.
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The analyst had to answer detailed questions from stakeholders, such as whether ETF issuers will publish addresses on the chain to ensure that users can check and see how the cash-create model works.
Seyffarth replied that Osprey Funds has published the addresses of its OBTC offering, but this is not a common practice among ETF issuers, according to CoinGape.
A natural model prepared by BlackRock for the SEC explains one feature of spot funds. The model includes five steps, starting with a market maker's (MM) request for redemption by an authorized participant (AP). The fund then approves the ETF order, the MM buys ETF shares through a listed exchange, and the MM transfers the ETF shares to the transfer agent. At this point, the ETF issuer must instruct the Bitcoin custodian to release the coin to the MM.
Under a cash model, the ETF issuer will first offer the BTC custodian to take the assets out of cold storage for sale after MM initiates the redemption. MM can then enter into a transaction with the ETF issuer to purchase BTC for dollars.
Issuers BlackRock and WisdomTree have already approved the cash-create model. Grayscale has also amended its SEC filing to state that "the fund can now accept payment orders," a concession that is seen as a positive development in the deliberative process and could help gain approval.
Recall that there were rumors that launching spot Bitcoin ETF will lead to creating unsecured BTC.
