The recent cbBTC announcement from Coinbase seems to have reignited concerns about the BTC purchases by the iShares Bitcoin Trust ETF (IBIT) being off-chain, essentially allowing them to buy BTC with IOUs. I remember seeing similar tweets flying earlier this year, and this topic has remained a thorn in the back of my mind that I wanted to get more comfortable with. I figured now would be as good a time as ever to look into the raw data.

First-off, where does it say the ETF can purchase BTC without immediate settlement? The first mention I could find was in the IBIT 10K filing for 2023, p.10.

The SEC-filing does state that the transfer is "off-chain" and that the ETF is allowed to use Trade Credits to purchase BTC.

The next question is, what are these Trade Credits? Going back to p.7, it is mentioned that the ETF must repay any Trade Credits used by 6pm the following business day. If not paid back on time, their BTC holdings may be seized and liquidated. Additionally, Trade Credits are mentioned to be interest-bearing.

So far, it looks like the ETF is able to buy BTC on credit "off-chain," but the extent of that credit line is limited to one business day and is an arms-length transaction with interest being charged. It is by no means a blank check.

Then if this is the case, has it been used yet?

I now go to the IBIT 10Q filing for June 2024. The first thing I look for is interest payments that would have been incurred if the Trade Credit had been used. The Statement of Operations does not show any interest expense; only the Sponsor's fees are visible, and any interest expense would have been accounted for as a separate line.

Next taking a look at the cashflow, I similarly do not see payments related to interest expense, which would have been shown under Operating Activities.

With the custodian being a Centralized Exchange (CEX), it is worth noting that ETF's BTC is not explicitly identifiable and is a pro-rata entitlement to the BTC held by Coinbase on behalf of all its customers. If there is any risk, it seems to be less about the ETF's ability to purchase BTC with IOUs, and more around the management of the underlying BTC by a CEX.

Going through the source data has given me comfort that the IOUs are not as big of a problem as it may seem.

1. the IBIT ITF can purchase BTC on credit (using IOUs).

2. Any credit purchase must be repaid to the Trade Credit Lender by the end of the next business day, with interest.

3. The Trade Credit line has not been used as of June 30, 2024. All purchases of BTC have been in cash.

4. IBIT's BTC is not held separately from other customers holdings with the Custodian (Coinbase). Any internal off-chain transactions within the Custodian remains opaque (as is always the case with CEXes)

The recent cbBTC announcement from Coinbase seems to have reignited concerns about the BTC purchases by the iShares Bitcoin Trust ETF (IBIT) being off-chain, essentially allowing them to buy BTC with IOUs. I remember seeing similar tweets flying earlier this year, and this topic has remained a thorn in the back of my mind that I wanted to get more comfortable with. I figured now would be as good a time as ever to look into the raw data.

First-off, where does it say the ETF can purchase BTC without immediate settlement? The first mention I could find was in the IBIT 10K filing for 2023, p.10.

The SEC-filing does state that the transfer is "off-chain" and that the ETF is allowed to use Trade Credits to purchase BTC.

The next question is, what are these Trade Credits? Going back to p.7, it is mentioned that the ETF must repay any Trade Credits used by 6pm the following business day. If not paid back on time, their BTC holdings may be seized and liquidated. Additionally, Trade Credits are mentioned to be interest-bearing.

So far, it looks like the ETF is able to buy BTC on credit "off-chain," but the extent of that credit line is limited to one business day and is an arms-length transaction with interest being charged. It is by no means a blank check.

Then if this is the case, has it been used yet?

I now go to the IBIT 10Q filing for June 2024. The first thing I look for is interest payments that would have been incurred if the Trade Credit had been used. The Statement of Operations does not show any interest expense; only the Sponsor's fees are visible, and any interest expense would have been accounted for as a separate line.

Next taking a look at the cashflow, I similarly do not see payments related to interest expense, which would have been shown under Operating Activities.

With the custodian being a Centralized Exchange (CEX), it is worth noting that ETF's BTC is not explicitly identifiable and is a pro-rata entitlement to the BTC held by Coinbase on behalf of all its customers. If there is any risk, it seems to be less about the ETF's ability to purchase BTC with IOUs, and more around the management of the underlying BTC by a CEX.

Going through the source data has given me comfort that the IOUs are not as big of a problem as it may seem.

1. the IBIT ITF can purchase BTC on credit (using IOUs).

2. Any credit purchase must be repaid to the Trade Credit Lender by the end of the next business day, with interest.

3. The Trade Credit line has not been used as of June 30, 2024. All purchases of BTC have been in cash.

4. IBIT's BTC is not held separately from other customers holdings with the Custodian (Coinbase). Any internal off-chain transactions within the Custodian remains opaque (as is always the case with CEXes)