Exception:Teaching Chain Internal Reference 11.23《blast has centralization risk》
A few days ago, Bitcoin spot ETF applicants such as BlackRock negotiated with the U.S. Securities and Exchange Commission (SEC) on some technical details of the ETF. One of the important contents of the consultation, which is also considered to be the last and most critical disagreement at present, is whether to use the in-kind (physical) or cash (cash) model to handle the creation and creation of ETF shares. Redemption.
This article has more than 3,300 words. It is hard-core and may be a bit brain-burning, so please pay attention.
Many articles and posts are filled with mist, and the more I read, the more confused I become. If you want to truly understand these two models, you have to look directly at the PPT written by BlackRock for the SEC. The focus is on the following two pictures:
The first picture is the physical model.
The second picture is the cash model.
First of all, in order to have a better intuitive understanding, we can replace the financial terminology with its underlying true meaning. The physical model is actually the BTC (Bitcoin) model. The cash model is the USD (U.S. dollar) model. Replacing the difficult and obscure financial "slang" with the approachable BTC and USD, doesn't it feel much easier to understand all of a sudden?
After the name change, as the name suggests, the so-called in-kind creation, that is, BTC creation, means directly linking the ETF shares to the amount of BTC, issuing additional ETF shares, and purchasing an equivalent amount of BTC. On the contrary, when ETF shares are redeemed, the equivalent amount of BTC is sold. This is a very intuitive and simple model.
In contrast, the so-called cash creation (cash creates), that is, USD creation, is to convert the ETF shares into the corresponding number of BTC through US dollars. To issue additional ETF shares, you must first convert into USD, and then convert the USD into BTC. Vice versa, the same goes for redeeming ETF shares.
Looking at the two pictures above, let's take a closer look at the specific operation procedures.
Let’s first look at the process of physical creation (BTC creation).
The squares in the picture are different entities. The dotted line is the information flow, while the solid line is the asset flow. We can see that the ETF issuer (ETF Issuer, white square) itself cannot contact the market maker (MM, Market Maker, yellow square), so it must be separated from them through a series of intermediaries or agents, such as AP (authorized participant, green square), TA (Transfer Agent, black square), and BTC Custodian (Bitcoin Custodian, blue square), etc.
APs are generally large banks, such as Bank of America (BAC), JPMorgan Chase (JPM), Goldman Sachs (GS), Morgan Stanley (MS), etc. They are the operators of the ETF business and directly control the issuance and redemption of ETF shares.
The picture BlackRock drew was the redemption process. When we read it backwards, we create the process.
The starting point of the process is that if the market maker needs more ETF shares, it needs to apply to the AP. After the AP negotiates and approves with the ETF issuer, it will issue additional ETF shares and hand them over to the TA (equivalent to giving them to the ETF issuer), and then the ETF issuer will direct the TA to give them to the market maker.
This often happens when a lot of U.S. dollars pour in from U.S. stock exchanges such as Nasdaq to buy the ETF. At this time, market makers continue to sell the newly issued ETF shares and recover US dollars.
At the same time, the market maker needs to hand over the equivalent amount of BTC purchased from the spot encryption exchange to the BTC custodian, which is actually equivalent to handing it over to the ETF issuer.
Market makers use US dollars to purchase BTC spot. Therefore, the US dollar is digested in the market maker's own body and will not move between entities, so it does not appear in this picture. The only assets that appear in the picture are ETF shares (scroll icon) and BTC (Bitcoin icon).
Note: The entire process takes 1 day. In other words, after the share application and creation are completed, the delivery of ETF shares and BTC spot will not take place until the next day, which is T+1.
The redemption process is exactly the reverse. When a market maker repurchases ETF shares in the market to a certain extent, it must apply to the ETF issuer to redeem BTC spot through AP.
After approval by the ETF issuer, delivery takes place on T+1: the market maker returns the ETF shares to the TA, and the ETF issuer instructs the BTC custodian to transfer the BTC spot to the market maker.
It can be seen that under the physical/BTC model, ETF issuers only need to deal with the correspondence and accounting between ETF shares and BTC, and do not need to worry about their current fluctuating US dollar prices in the market.
Essentially, this is equivalent to using BTC to price ETF shares. For example, my ETF splits BTC into 10,000 shares, so one ETF share is equal to 0.0001 BTC, which is 1,000 satoshis.
BlackRock prefers this approach. But the SEC disagrees. The SEC prefers the second option, the cash/USD model.
At a glance, you can feel that the cash/USD model is much more complicated than the physical/BTC model above. Let’s first take a look at the specific process, and then understand the comparison between the two and why they hold different positions.
In the cash/USD model, the ETF issuer needs to add an agent role, that is, the cash custodian (Cash Custodian, and TA are drawn in the same black square, which means that the two roles can be played by the same entity).
Let’s talk about creation first. The starting point of the process still starts with the market maker applying for new ETF shares. The difference is that on the day of approval, the market maker must complete a series of operations: sell the ETF in the US stock market, buy BTC in the crypto market, and then hand over the BTC spot to the BTC custodian (i.e., the ETF issuer).
Note that at this time, TA will give the US dollars needed to purchase BTC to the market maker. It is equivalent to the market maker buying BTC using the ETF issuer's money instead of his own money, that is, buying BTC spot on behalf of the ETF issuer.
On the next day (T+1), the TA and cash custodian directed by the market maker and ETF issuer will deliver the ETF shares and US dollar cash. The market maker hands over the US dollars gained from selling the ETF to the cash custodian (i.e., the ETF issuer), and TA (i.e., the ETF issuer) hands over the newly issued ETF shares to the market maker.
It can be seen that under the cash/USD creation model, the use of US dollars USD separates the two markets. The market maker is more like a "tool man". He only needs to trade ETF shares/USD and BTC/USD in the two markets without any brain.
If the time difference between the two market operations or the price difference between the markets and other factors lead to arbitrage or loss between markets, then under the second model, the market maker does not need to bear such an inter-market risk.
The redemption process is similar, but in the opposite direction. The market maker first buys back the ETF from the US stock market and sells BTC in the crypto market (the recovered USD is immediately handed over to the cash custodian). The next day (T+1), the market maker and TA deliver: the market maker hands over the repurchased ETF share to the TA, and the TA returns the US dollars to the market maker.
If we put aside the various entities established for compliance and abstract from the perspective of assets, then the former physical/BTC model is essentially the direct exchange of ETF <-> BTC, and the latter cash/USD model Essentially, it is an indirect exchange of ETF <-> USD <-> BTC.
As an issuer and trader, BlackRock naturally hopes to use a physical/BTC model that is simpler for itself and where the issuer does not have to bear inter-market risks. However, as a regulator, the SEC will tend to adopt the cash/USD model. Firstly, it isolates the risks of the two markets and makes it easier to supervise them separately. Secondly, it ensures the dominant position of the US dollar as the pricing currency. Thirdly, it can more conveniently Taxes are imposed on participating entities - as taxes are dollar-pegged.
Therefore, some analysts say that the cash/USD model has more advantages in spread and taxation. This is obviously from the standpoint of market makers and regulators.
In addition, some self-media still have some wrong statements and understandings.
For example, it is wrong to say that the cash/USD model has a stronger pulling effect. Under both scenarios, the inflow of U.S. dollars into ETFs leads to a pullback in BTC, and the outflow of U.S. dollars leads to a selloff. It is liquidity that determines it, not the model and operation method.
Another example is that investors take (inter-market) risks, which is also wrong. Inter-market risk is only allocated between market makers and ETF issuers, which is also one of the differences between the two schemes, as explained in detail above. As for whether they will transfer risks to investors in some way, that is not a question included in the above model.
There is also a common misunderstanding that under the physical/BTC model, investors will receive physical BTC when selling ETFs, while under the cash/BTC model, investors will receive US dollars. This understanding is also wrong. ETF investors in the U.S. stock market use U.S. dollars to buy ETFs, and when they sell the ETFs, they get back U.S. dollars. BTC investors in the crypto market sell BTC to recover US dollars, and use US dollars to buy BTC.
In other words, there is not much difference in the feelings between these two options for investors in the end market.
Exception:Teaching Chain Internal Reference 11.23《blast has centralization risk》
(Public account: Liu Jiaolian. Knowledge Planet: The public account replies "Planet")
(Disclaimer: None of the content in this article constitutes any investment advice. Cryptocurrency is an extremely high-risk product and may return to zero at any time. Please participate with caution and be responsible for yourself.)