Introduction
BlackRock’s Canadian division has activated securities lending for its iShares Bitcoin ETF, enabling the fund to generate additional revenue through lending its bitcoin holdings. The move follows a 60-day notice period and aligns with established practices for other iShares ETFs in Canada. This development introduces both income opportunities and new risk considerations for investors in the $358.9 million CAD fund.
Key Points
- Borrowers must post 102% collateral with daily mark-to-market valuation and cash collateral invested only in highly liquid securities with 90-day maximum maturities
- BlackRock provides borrower default indemnity, committing to replace any unreturned securities and limiting lending to 50% of fund NAV
- The program introduces risks including delayed security returns affecting corporate actions and potential regulatory changes impacting loan treatment
Strategic Expansion of Bitcoin ETF Revenue Streams
BlackRock has confirmed that its Canadian arm will begin securities lending for the iShares Bitcoin ETF (IBIT) starting August 25, following the required 60-day notice period provided to investors. This strategic move, initially disclosed in the June 26 prospectus, aligns IBIT with other iShares ETFs in Canada that already utilize securities lending to generate incremental income. The program represents a significant evolution for the Bitcoin-focused fund, which launched in January and currently manages approximately CAD $358.9 million (equivalent to US $257 million) in assets.
Securities lending allows the IBIT fund to loan its Bitcoin holdings to borrowers, typically financial institutions, in exchange for collateral and lending fees. These institutional borrowers often use the borrowed securities to cover settlement gaps, meet collateral requirements, or support short-selling strategies. By opening IBIT to securities lending, BlackRock is effectively broadening the ETF’s revenue sources beyond traditional management fees, potentially enhancing returns for investors who hold exposure to the flagship digital asset in both Canadian and US dollars.
Robust Risk Management Framework and Operational Structure
BlackRock Canada has appointed two affiliated entities as lending agents for the IBIT securities lending program: BlackRock Institutional Trust Company (BTC) based in San Francisco and BlackRock Advisors (UK) Limited (BAL) headquartered in London. This global operational structure leverages BlackRock’s extensive experience in securities lending across traditional financial markets while applying it to the emerging digital asset space.
The program incorporates multiple layers of protection designed to mitigate risk. Borrowers must post collateral worth at least 102% of the market value of the loaned securities, with this collateral marked to market daily. The collateral may take the form of cash or other securities, providing flexibility while maintaining security. To further limit exposure, BlackRock has implemented a cap ensuring that no more than 50% of the fund’s net asset value may be on loan at any given time, preserving significant liquidity within the ETF.
Cash collateral received through the lending program will be invested exclusively in highly liquid securities with maturities of 90 days or less, reflecting BlackRock’s emphasis on quality, liquidity, and interest rate sensitivity. The program will be supported by BlackRock’s internal risk management team, which utilizes proprietary technology and quantitative models to continuously monitor exposures and safeguard against market disruptions.
Balancing Enhanced Returns with Investor Protection
Despite the comprehensive safeguards, securities lending introduces specific risks that could impact IBIT holders. These include potential delays or failures by borrowers to return securities, which might prevent the ETF from participating in corporate actions such as mergers or dividends. Market conditions could also prompt lending agents to scale back activity, reducing potential revenue generation. Furthermore, shifts in tax or regulatory rules may alter the treatment of loaned securities, potentially delaying or reducing payments owed to the fund.
BlackRock addresses the most significant risk—borrower default—through an indemnity arrangement that commits the firm to replace any securities not returned in the event of borrower failure. This policy ensures that, even if a borrower defaults, BlackRock should be able to restore the portfolio without material impact to investors. The combination of collateralization above 100%, the 50% lending cap, and the default indemnity creates a multi-layered safety net designed to protect investor interests while pursuing additional yield.
The activation of securities lending for IBIT represents a maturation of Bitcoin-based investment products in Canada, bringing cryptocurrency exposure closer to established traditional finance practices. As BlackRock extends this revenue-generating strategy to its Bitcoin ETF, investors gain potential for enhanced returns while navigating the inherent complexities of securities lending in the digital asset space. The move signals growing institutional confidence in cryptocurrency infrastructure while maintaining the risk management discipline characteristic of traditional finance.
📎 Related coverage from: cryptoslate.com