21 Changes in BlackRock's Recent Spot Bitcoin ETF Application

BlackRock has updated its S-1 form for the iShares Bitcoin Trust, a proposed spot Bitcoin exchange-traded fund (ETF), with a seed investment of $100,000. 

On December 4th, 2023, the company introduced a number of amendments focusing on aspects such as the Trust’s structure, operations, risks, and disclosures. 

These revisions aim to strengthen security for Bitcoin and private keys, provide transparent valuations, improve operations between entities like the Bitcoin Custodian and Prime Broker, and establish plans for unforeseen events.

The amendments cover a range of topics, including custody arrangements, valuation methods, market determinations, pricing indicators, fork handling, liability limits, risk disclosures, and cash management.

These changes provide insight into the risk management and governance principles of the Trust.

Here is an overview of 21 major amendments made to the BlackRock spot Bitcoin ETF filing on December 4th:

1. Seed Funding: BlackRock has secured $100,000 to start the fund, buying 4,000 shares at $25 each. These initial shares will later be sold for cash, with more purchases planned but not yet disclosed.
2. Fees: The management fee for the fund is currently fixed, but BlackRock may reduce it in the future and will inform investors if that happens.
3. Security of Assets: All Bitcoin keys held by the fund's custodian will now be stored in 'cold storage,' instead of a mix of less secure methods like hot wallets.
4. Asset Holdings: The fund's broker will hold assets that represent a share in the fund's total Bitcoin, mostly in cold storage, rather than specific Bitcoin.
5. Trading Suspensions: BlackRock outlined scenarios, like problems with key service providers, that could halt trading of the fund's shares.
6. Market Conditions: The fund acknowledges that other Bitcoin investments might be more attractive, affecting the demand for its shares.
7. Liability Limits: The document defines the limits of the broker's liability in cases like negligence.
8. Regulatory Uncertainties: The proposal discusses how changes in laws and regulations, including new legislation, could affect the fund.
9. Ripple XRP Case Reference: The filing references the SEC's legal action against Ripple to illustrate potential regulatory risks for cryptocurrencies, highlighting the possibility of Bitcoin being classified as a security.
10. UK and EU Regulations: Addresses new regulations in these regions and how unexpected global events can affect digital asset prices.
11. Compliance Procedures: Despite enhanced procedures to comply with anti-money laundering laws, there are still risks for inaccuracies from market makers.
12. Bitcoin Custody Changes: The fund has streamlined Bitcoin custody to exclusively use cold storage and clarified its relationship with its prime broker.
13. Valuation Policy: Adopted a new policy for determining the value of its Bitcoin, including a range of data to be published on its website.
14. Bitcoin Exchange Criteria: Set strict criteria for selecting Bitcoin exchanges to be included in the CF Benchmarks Index.
15. Real-time Value Updates: Introduced a method to provide investors with up-to-date information on the Trust's value changes.
16. Legal Protections: Clarified legal protections and succession plans for trustees.
17. Cold Storage Focus: Emphasized the exclusive use of cold storage for all private keys associated with the fund's Bitcoin.
18. Cold Storage Protocols: Detailed its enhanced security measures for storing private keys.
19. Fork and Termination Policies: Detailed its approach to handling blockchain forks and the terms for ending its custodian agreement.
20. Asset and Cash Management: Specified how the fund's assets will be managed and stored, including cash management practices.
21. Trade Credit Lender Operations: Outlined the risks and procedures associated with Bitcoin sales if trade credits are unavailable.

The recent amendment to BlackRock's S-1 form provides detailed insights into its initial engagement as a Seed Capital Investor. On October 27th, BlackRock acquired $100,000 worth of shares, buying 4,000 shares at $25 each, termed "Seed Shares." 

A new mechanism for converting these Seed Shares into cash, as well as the formation of "Seed Creation Baskets" through additional purchases, is introduced. However, specifics like the transaction date, Bitcoin value, share price, and related indices remain undisclosed. 

The update also addresses fee transparency for the iShares Bitcoin Trust, with BlackRock committing to inform shareholders about any future fee waivers. 

The Trust's security measures have been enhanced, notably by storing all private keys in cold storage, thereby increasing the protection of its Bitcoin assets. 

The document outlines circumstances under which transactions involving the Trust's shares may be suspended, providing clarity on operational interruptions. 

It acknowledges that varying market conditions might make alternative investments more attractive than the Trust’s shares, potentially impacting their demand and liquidity. 

The Prime Broker's liability limitations now include gross negligence and confidentiality breaches, and the document discusses potential impacts of regulatory changes on digital asset markets and the Trust's asset value. 

Notable examples include the SEC's action against Ripple and updates on regulatory developments in the UK and EU. 

The Trust has also updated its compliance protocols, including anti-money laundering measures and a comprehensive KYC process, and revised its NAV determination process to include fair value policies.

Lastly, the amendment introduces new legal protections for separate trustees, allowing the Sponsor more control, and emphasizes the exclusive use of cold storage for private keys to enhance security. 

It simplifies explanations of these security measures and updates policies regarding blockchain forks and the termination provisions of the Custodian Agreement. 

The management of the Trust's Bitcoin and cash holdings is tightened, with specific conditions for temporary holding by the Prime Broker. 

Additionally, changes concerning lender risk address the operations of the Trade Credit Lender, including the removal of the maximum amount of Trade Credit and detailing new protocols for Bitcoin holdings management.