- The United States Securities and Exchange Commission (SEC) initially approved a Bitcoin
-related futures ETF in October 2021, but the current applications are for physical Bitcoin ETFs. - Most asset managers have either had to withdraw their applications for spot Bitcoin ETFs or face the risk of rejection due to the SEC’s concerns about spot-based derivative ETFs.
- With the entry of BlackRock, market experts have begun to believe that the approval of a spot Bitcoin ETF is highly likely. One of the significant factors that have hindered the approval of a spot ETF is the nature of the fund.
A recurring topic in the Bitcoin market is spot Bitcoin ETFs. A spot Bitcoin ETF has not been approved in the U.S. yet, so why is the SEC concerned?
Companies Awaiting Approval for a Spot Bitcoin ETF
In the United States, the race to list the first physically settled spot Bitcoin exchange-traded fund (ETF) was witnessed with the entry of major financial institutions such as BlackRock, Fidelity, and VanEck.
The United States Securities and Exchange Commission (SEC) initially approved a Bitcoin-related futures ETF in October 2021, but the current applications are for physical Bitcoin ETFs. Following Grayscale’s recent legal victory against the SEC’s proposal for a physical Bitcoin ETF, many believe that the approval of investment funds is now more likely.
Considering BlackRock’s interest and its status as the world’s largest asset manager with over $8 trillion in assets globally, it has prompted many other institutions to reapply for a physical Bitcoin ETF.
Most asset managers have either had to withdraw their applications for spot Bitcoin ETFs or face the risk of rejection due to the SEC’s concerns about spot-based derivative ETFs. Here are the primary Bitcoin ETF application holders:
- BlackRock: On June 15, BlackRock submitted an application for a spot Bitcoin ETF, using Coinbase as the crypto custodian and BNY Mellon as the cash custodian. This application surprised both the crypto and traditional financial worlds, especially since BlackRock’s CEO, Larry Fink, had previously referred to BTC as an index of money laundering. On July 15, the SEC officially accepted BlackRock’s spot Bitcoin ETF application for review.
- WisdomTree: WisdomTree, a New York-based asset manager, initially applied for a spot Bitcoin ETF in the U.S. on December 8, 2021, but it was rejected by the SEC in 2022. After BlackRock entered the competition for a spot Bitcoin ETF, WisdomTree reapplied on July 19.
- Valkyrie Investments: Valkyrie, an asset management company, first applied for a spot Bitcoin ETF in January 2021 but was rejected by the SEC, like many other asset managers. However, with renewed interest in the spot Bitcoin ETF, Valkyrie reapplied on June 21. The ETF will reference the price of Bitcoin on the Chicago Mercantile Exchange (CME) and Xapo will serve as the crypto custodian.
- ARK Invest: ARK filed an application for the ARK 21Shares Bitcoin ETF. ARK Invest plans to offer this fund in collaboration with Swiss-based ETF provider 21Shares, and if approved, it will begin trading under the symbol ARKB on the Chicago Board Options Exchange (Cboe) BZX Exchange.
- VanEck: VanEck was one of the earliest applicants for a Bitcoin ETF, first applying in 2018. The asset manager withdrew its application in 2019 and made a second attempt with trust fund shares scheduled to be traded on the Cboe BZX Exchange in December 2020. The company made a new application in July 2023.
- Fidelity/Wise Origin: Fidelity Investments applied for a spot Bitcoin ETF in 2021 and reapplied for the Wise Origin Bitcoin Trust on July 19, 2023. Fidelity Service Company will serve as the administrator for Wise Origin Bitcoin Trust, and Fidelity Digital Assets will be the BTC custodian.
- Invesco Galaxy Bitcoin ETF: Invesco, in partnership with Galaxy Digital, submitted an application for the Invesco Galaxy Bitcoin ETF on September 22, 2021. The joint venture was refiled, with the ETF being “physically supported” by Bitcoin, and Invesco Capital Management will act as the sponsor.
- Bitwise: Bitwise initially applied for a spot Bitcoin ETF in October 2021 but was rejected by the SEC. The asset manager reapplied in August 2023.
- GlobalX: Fund manager GlobalX submitted a series of spot Bitcoin ETF applications in collaboration with several financial giants in 2021. The company reapplied in August 2023, becoming the ninth applicant. GlobalX named Coinbase as its surveillance sharing partner.
Considering Grayscale’s recent legal victory and the refiled applications, ETF analysts at Bloomberg have raised the probability of approval for a spot Bitcoin ETF from 65% to 75%.
As expected, the SEC has deferred decisions on all seven applicants. Analysts speculate that the SEC may not make a decision on the ETF until early 2024 as the deadlines approach.
Why did the SEC reject previous spot Bitcoin ETFs?
When rejecting VanEck’s previous spot Bitcoin ETF, the SEC claimed that the Bitcoin market was not large or mature enough to sustain ETF market demand. The Commission also criticized the level of price volatility and inadequate trade surveillance, suggesting that the market could be susceptible to fraud and manipulation.
However, with BlackRock’s entry, market experts have started to believe that the approval of a spot Bitcoin ETF is highly likely. One of the significant factors that have hindered the approval of a spot ETF is the nature of the fund. A futures ETF is based on futures contracts rather than the digital asset itself, which is considered a significant distinction. Futures markets are already heavily regulated to prevent market manipulation, making it easier for the SEC to approve such ETFs.
One of the key concerns behind the rejection of spot ETFs is that the issuer must include a “surveillance-sharing agreement” with a sufficiently large and regulated Bitcoin market that allows the SEC to conduct thorough investigations in the event of market irregularities. Such agreements are essential to enable the SEC to conduct comprehensive investigations in the event of market irregularities.
One Bitfinex Alpha analyst stated that one of the fundamental concerns behind the rejection of spot Bitcoin ETFs is the regulator’s ability to continually monitor the security and custody status of assets. However, for this to happen, the U.S. would need more regulatory and legal infrastructure before allowing such an ETF provider to handle it.
The analyst added: “Otherwise, the purpose of an ETF (not dealing with digital asset wallets or crypto exchanges) would have been defeated. So, it wouldn’t be accurate to say that spot Bitcoin ETFs don’t raise manipulation concerns in the eyes of the SEC. The rejection of the ProShares Bitcoin ETF in 2018 clarifies this point. Another concern about the documents’ literature was the ability to handle the volume brought about by the introduction of a spot ETF.”
The SEC is concerned about the resilience of trading mechanisms. The regulator oversees futures trading exchanges such as CME and Cboe, and any futures ETF can only trade on these regulated venues. There is no SEC-regulated spot exchange.
However, not everyone shares the SEC’s assumptions about the security weaknesses in the spot crypto ETF market. James Koutoulas, the founder of Typhon, a futures-focused hedge fund, stated, “I can say that futures trading in crypto is much worse than the spot market in terms of tracking error. The idea that a U.S. regulator could provide enough ‘surveillance’ over a global 12-digit market to prevent manipulation is wishful thinking. So, to be honest, it probably comes down to maintaining plausible deniability rather than going to the CFTC. A BTC ETF might not be perfect, but it’s as safe as buying BTC from SBF [Sam Bankman-Fried] on FTX with Gensler’s family.”
Richard Gardener, CEO of technology infrastructure company Modulus, pointed out that futures ETFs have long been seen as more acceptable to regulators, and the issue of approving a spot ETF is not about “if” but “when.”
