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Fidelity Bitcoin Spot ETF Process Chart: A Deep Dive into the Physical Operation Model of Interest to the SEC

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Fidelity Bitcoin Spot ETF Process Chart: A Deep Dive into the Physical Operation Model of Interest to the SEC

The asset management giant Fidelity recently met with the SEC's Division of Trading and Markets to discuss their physical creation and redemption design, followed by the submission of a second S-1 amendment. Previously, BlackRock also proposed a similar physical model. What is the key reason why the U.S. Securities and Exchange Commission (SEC) has not yet approved a Bitcoin spot ETF?

Fidelity Bitcoin Spot ETF Process Diagram

Fidelity has met with SEC officials to discuss the recent Bitcoin spot ETF process diagram, which states in its document:

Physical creation, arbitrage, and hedging are more effective. ETF self-clearing market makers with a clearing mechanism can act as APs (Authorized Participants) on behalf of non-self-clearing ETF market makers with cryptocurrency affiliates, facilitating efficient arbitrage. Allowing for physical creation and redemption is crucial for enhancing trading efficiency for all participants and secondary market pricing.

As shown in the diagram below, market makers with a self-clearing mechanism are outlined in purple, representing APs, who are registered broker-dealers and cannot directly access physical bitcoins.

Market makers without a self-clearing mechanism are outlined in red, representing unregistered broker-dealers who can access physical bitcoins.

Nate Geraci, President of advisory firm The ETF Store, wrote on Twitter:

The key to this workflow is that registered broker-dealers will not touch the tokens in any part of the process. This is clearly a concern for the SEC.

BlackRock's Physical Model Has Similarity

BlackRock also met with the SEC earlier to discuss the physical ETF model. Bloomberg ETF analyst Eric Balchunas believed the biggest difference lies in:

Offshore entities market makers acquire bitcoins from Coinbase and then prepay cash to U.S. registered broker-dealers. In other words, U.S. registered broker-dealers are prevented from touching bitcoins.

We use red lines to indicate that only unregistered broker-dealers market makers can access physical bitcoins.

This aligns with our previous speculation; the SEC hopes to limit the list of entities that can trade physical bitcoins, as market manipulation has always been a major reason why the SEC has not approved spot Bitcoin ETFs.

Illustration of ETF｜How does the SEC prefer ETF cash mode compared to BlackRock's physical Bitcoin ETF?

Is Traditional Finance and the Crypto Industry Prepared?

As Fidelity and the U.S. Securities and Exchange Commission delve into technical details, Bitcoin's price has surged again. Most of the next approval windows for Bitcoin spot ETFs fall around January 10, 2024. Recent intensive meetings and constantly updated proposals between various asset management companies and the SEC have also deepened market optimism.

These back-and-forth discussions involve potential rule changes in the cryptocurrency field. The intricate details of ETF operational processes and their impact on the market also reflect whether a mature industry is adequately prepared for significant evolution.