Spot Bitcoin ETFs: Regulatory Progress on the Horizon After a decade of waiting, spot Bitcoin ETFs may be nearing regulatory approval. Recent developments, including a flurry of applications and legal battles, suggest the SEC is reconsidering its stance. Investors and the cryptocurrency market eagerly await the potential approval of these much-anticipated investment vehicles.
It’s been a decade since Tyler and Cameron Winklevoss first applied for a spot bitcoin exchange-traded fund (ETF) in 2013, and yet the U.S. market is still devoid of a spot bitcoin ETF. However, a change may be on the horizon. Sifting through the noise to discern the signs indicating the SEC’s readiness to approve the first spot bitcoin ETF is a challenging task. Still, it’s crucial to distinguish between true signals and distractions.
A Brief History The SEC rejected the initial bitcoin ETF filing in 2017, citing concerns about the lack of regulation in crypto markets. The fact that bitcoin is traded on unregulated exchanges made it nearly impossible for an ETF’s listing exchange to prevent manipulation. The SEC stipulated that the listing exchange must enter into a surveillance-sharing agreement with a regulated bitcoin-related market of significant size.
Spot Bitcoin ETFs: Nearing The Ultimate Decision Point
This pivotal market test remained a stumbling block for subsequent spot bitcoin ETF filings. Numerous crypto ETF applications were withdrawn or denied after the Winklevoss proposal met its fate. The SEC’s stance appeared to soften with the approval of the first bitcoin futures ETF in 2021, nearly four years after CME Group introduced bitcoin futures. The SEC considered bitcoin futures as securities traded on a regulated exchange, negating the need for the significant market test.
But these futures-based bitcoin ETFs weren’t what investors were hoping for. They came with roll costs, the potential for high taxable distributions, and fees that investors could avoid by directly purchasing bitcoin. Nonetheless, the first bitcoin futures ETF, ProShares Bitcoin Strategy ETF (BITO), became the fastest ETF to reach over $1 billion in assets. The initial excitement waned as bitcoin’s price plummeted. As of October 24, 2023, cumulative assets of bitcoin futures ETFs were just under $1.2 billion.
Spot Bitcoin ETFs In The Spotlight: New Hope Amidst Legal Battles
In 2023, the SEC approved “ether” futures ETFs and the first leveraged bitcoin futures ETFs. Still, investors’ focus remained on the much-anticipated spot bitcoin ETF. Optimism for a spot bitcoin ETF was rekindled when BlackRock filed for one in June 2023, leading to a flurry of applications by other issuers, each vying to be the first approved by the SEC.
Simultaneously, Grayscale Investments, a potential spot bitcoin ETF issuer, sued the SEC, alleging that the SEC’s rejection of its application was unlawful. The D.C. Circuit Court of Appeals sided with Grayscale, primarily because the SEC failed to explain why spot bitcoin ETFs are exposed to different risks than bitcoin futures ETFs, given that both rely on the same bitcoin markets.
Hope for a spot bitcoin ETF was reinvigorated following the court’s decision and the entry of the world’s largest asset manager into the arena. Crypto enthusiasts and investors eagerly anticipated any sign of the SEC’s approval of the first spot bitcoin ETF.
Fact or Fiction As it stands, the SEC appears poised to approve the inaugural spot bitcoin ETF. The initial deadline for approval or denial is in early January 2024. This serves as the baseline for when approval is expected, as the SEC, listing exchanges, and other regulators need time to establish the necessary infrastructure before spot bitcoin ETFs can trade on stock exchanges.
What sets this filing apart from previous attempts over the last decade? Let’s sift through several rumors to determine which are factual and which are not:
Fact — The SEC would need a new reason to reject spot bitcoin ETF filings. The federal circuit court’s ruling in favor of Grayscale dealt a significant blow to the SEC’s use of the significant market test. The court found that the SEC had not distinguished its treatment of spot bitcoin ETFs from bitcoin futures ETFs, making its rejection of spot bitcoin ETFs “arbitrary and capricious.” The path of least resistance for the SEC is to approve a spot bitcoin ETF.
Fact — Increased engagement between the SEC and issuers. The SEC appears to be more engaged with issuers, opening a line of communication that previously did not exist. This rumor is rooted in reality, as issuers have corresponded with the SEC about their applications and made several amendments in response, indicating a more collaborative approach than in the past.
Fiction — DTCC’s addition triggers rumors of imminent approval. X, formerly known as Twitter, buzzed with speculation when a screenshot began circulating from the DTCC website, listing iShares Bitcoin Trust with an undisclosed ticker. Reuters wisely contacted the DTCC to inquire about this, and it turns out it was a standard addition from August and not indicative of approval.
Fiction — Cointelegraph tweeted “BREAKING: SEC APPROVES ISHARES BITCOIN SPOT ETF.” This rumor was swiftly debunked, but not before causing a 7% spike in bitcoin’s price. The price quickly receded once it became clear that the source of the news was an unattributed message on a Telegram channel.
What Does a Spot Bitcoin ETF Mean for Investors? With investor interest at an all-time high, more rumors are likely to circulate before the SEC makes a final decision. It’s crucial not to be the one who buys bitcoin based on an unsourced tweet. The risks extend beyond price volatility; legal and regulatory issues loom large in the crypto market. Investors should exercise caution and only invest what they can afford to lose.
For instance, when the first bitcoin futures ETF, BITO, launched in October 2021, bitcoin investors were ecstatic. However, it coincided with the peak of bitcoin’s decade-long rally. One year later, it had plunged over 70%, a hole it has yet to fully recover from.
Nonetheless, a spot bitcoin ETF may be a better option than any other bitcoin fund currently available. Spot bitcoin ETFs should offer lower fees, no roll costs (unlike futures ETFs), and close tracking of bitcoin’s price, unlike grantor trusts like Grayscale Bitcoin Trust (GBTC).
The market is primed for a spot bitcoin ETF, and it could represent an upgrade over existing funds. Time will tell if bitcoin is a wise investment.