Ark ETF Update Is Confusing But Promising News

Further updates to Ark Invest's spot BTC application reveal some interesting details, but also raise confusion.

On of the strangest changes is a change in the language to "indirect exposure" to bitcoin:

The Trust does not provide investors with direct exposure to spot bitcoin, and an investment in the Trust is not a direct investment in bitcoin. Rather, the Trust provides investors with the opportunity to indirectly access the market for bitcoin through a traditional brokerage account without the potential barriers to entry or risks involved with holding or transferring bitcoin directly or acquiring it from a bitcoin spot market.

It's unclear what this means. It's possible that it might simply imply that BTC is being bought via an intermediary, and therefore the trade may not happen instantly, as it does when a user buys crypto on a regular crypto exchange. That is, it could just be a clarification or protective language.

What it does mean for sure is that the SEC is continuing to engage, and that's positive news.

0.8% Fee

Another development in this filing is the inclusion of a fee for the first time. The ETF will change 80 bps, or 0.8%. This is relatively high for an ETF, though not particularly unusual.

It's quite likely that other providers will now make updates with lower fees. For example, BlackRock is large enough to undercut Ark, so a race to provide the most efficient exposure to BTC for institutional investors is on the cards.

In-Kind Creation

Another theme of recent updates has been cash creation vs in-kind creation. The SEC appears to be leaning on issuers to go down the cash creation route, possibly to avoid problems of brokers having to rely on unregistered entities to acquire BTC.

With in-kind creation, an institution delivers equivalent assets (BTC here) and receives shares of the spot Bitcoin ETF in return. Cash creation involves the participant giving the provider cash and receiving ETF shares. The SEC appears to be pushing for cash creation, which is the less-usual model for ETFs.

The reason for this is that current regulation does not allow broker-dealers to transact in bitcoin directly. Cash creations place that responsibility on the ETF issuer. This prevents broker-dealers from being forced to engage with unregistered exchanges for bitcoin transactions.

However, it looks like Ark has gone against the SEC's recommendation, and will try to push through in-kind creations, perhaps because this is a more tax-efficient way of creating ETF shares.

Most importantly of all, the stream of (relatively minor) updates shows that the SEC is working with issuers, and there is no good reason to believe that one or more ETFs will not be approved soon.

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