Author: Greg Cipolaro, Global Head of Research at NYDIG
Translation: WEEX Blog
Summary: Given the advantage of “winner takes all,” it is no surprise that the recent competition for a spot in the physical bitcoin ETF market is heating up. Based on the experience with the Bitcoin Futures ETF (BITO), the first approved BITO has already captured 93% of the existing fund management scale (AUM), or $1.13B.
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1. BlackRock has launched a new competition for a physical bitcoin ETF, outlining the next steps for review.
2. The deadline for feedback on the recent filing has not yet been set, as a proposal to change exchange rules has not yet been published in the Federal Register.
3. Although BlackRock’s approval is far from certain, its filing has had a ripple effect on other financial products, such as the Grayscale Bitcoin Trust and the Ark 21Shares Bitcoin ETF.
BlackRock attempts to launch a physical bitcoin ETF
On June 15th, BlackRock, the main sponsor of Exchange Traded Funds (ETFs), launched the approval process for a physical bitcoin ETF – iShares Bitcoin Trust, which manages $2.4T in ETF products. BlackRock submitted a registration statement (S-1) for the fund to the U.S. Securities and Exchange Commission (SEC), and Nasdaq submitted a 19b-4 filing asking the SEC to change the rules to allow trading in a physically backed bitcoin ETF. To list a new ETF, the exchange requires an exemption from the SEC, but so far, the SEC has refused to grant an exemption for a physically backed bitcoin ETF, making it unavailable to investors.
The reason this physical bitcoin ETF filing is noteworthy is that BlackRock has had almost a perfect record in obtaining ETF approvals (255 out of 256), which is in stark contrast to the SEC’s refusal of physically backed bitcoin ETFs (28 out of 28). Investors have viewed the application by this industry giant as a positive signal, and after the news broke, the price of bitcoin rose more than 20% (according to WEEX trading platform data, BTC rose 10.28% on June 21st, and a cumulative 19.06% from June 16th to 23rd). Although BlackRock’s latest filing attempts to address the shortcomings of its previous filing by implementing a Supervisory Sharing Agreement (SSA), which is operated by an unnamed cryptocurrency exchange (reportedly Coinbase) in collaboration with Nasdaq to detect and prevent fraudulent and manipulative trading activity, this does not guarantee a successful application.
WEEX Note: The Surveillance Sharing Agreement (SSA) aims to increase the effectiveness of financial market monitoring, especially in cases involving financial products such as ETFs. The agreement establishes a cooperative relationship, allowing exchanges and regulatory agencies to share information and data in order to better monitor market manipulation, fraudulent behavior, and other improper trading activities.
This article does not intend to defend the position of either party in this regulatory game. Instead, we believe that it may be more meaningful to outline the steps that will be taken in the application process and the impact on spot Bitcoin and other financial products.
Overview of the Review Process
The birth of spot Bitcoin ETFs began with the submission of a registration statement to the SEC using the S-1 form (under the Securities Act of 1933). It should be noted that this differs from the process for most ETFs previously approved in the United States, such as the popular ProShares Bitcoin Strategy ETF (BITO), which holds Bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME) and filed a registration statement using the N-1A form (under the Investment Company Act of 1940). And there is already an approved ETF under the Securities Act of 1933, the Teucrium Bitcoin Futures Fund.
WEEX Note: In April 2022, the SEC approved applications by fund issuer Teucrium and NYSE Arca to launch a Bitcoin futures ETF, making Teucrium the latest addition to ProShares, Valkyrie, and VanEck in the Bitcoin futures ETF lineup. However, unlike the others, Teucrium’s application was based on the Securities Act of 1933, not the Investment Company Act of 1940.
As usual, after filing a registration statement with the SEC, the securities exchange where the proposed ETF will trade submits a proposed rule change under Form 19b-4 to apply for an exemption from the SEC. As mentioned earlier, exchanges need to obtain SEC exemptions to list new ETFs. Typically, there is a delay between the submission of the registration statement and the 19b-4, but for BlackRock iShares Bitcoin Trust, they were submitted on the same day, perhaps to take advantage of the positive news of the filing, or perhaps driven by CoinDesk’s early June 15th scoop. Currently, all incomplete spot ETF applications propose to trade on one of three exchanges: Nasdaq, Chicago Board Options Exchange (CBOE) BZX, or NYSE Arca.
There is currently no clear approval schedule for the BlackRock ETF
As is customary, after the exchange (on its website) publishes the 19b-4, the SEC publishes a notice on its website soliciting comments on the proposed rule change and including a proposal summary. There may also be a few days’ delay between the submission of the 19b-4 and the submission of the notice.
It is worth noting that the countdown to approval or rejection does not begin until the SEC’s filing notice is published in the Federal Register. The Federal Register is the official gazette of the U.S. government containing agency rules, proposed rules, and notices, and not the submission of the 19b-4 (see “U.S. Code Title 78 – Registration, Responsibility, and Oversight of Self-Regulatory Organizations,” WEEX Weike Note). Once the notice of submission is published in the Federal Register, the 240-day clock begins to tick, with response deadlines of 45, 45, 90, and 60 days (in order).
Before making a final decision to approve or reject the rule change, the SEC can postpone decisions on ETF applications three times, solicit comments, or provide more information. It has the authority to approve or reject the application at any time during this process, but historically, all applications involving spot ETFs have gone through most of the 240-day process before being rejected. Therefore, some believe that if the SEC delays its decision on the BlackRock ETF’s first response deadline (which is currently undetermined), it means that the application will ultimately be rejected. This may be true, but there are exceptions, such as the Teucrium ETF, which went through almost the entire 240-day process, including three delays, but was eventually approved.
While we have no doubt that the BlackRock iShares Bitcoin Trust’s rule change filing notice will eventually be published in the Federal Register, it is worth noting that as of the writing of this article, the notice has not been published, so the approval/rejection/deferral schedule is currently unknown.
GBTC discount narrows as others apply for ETFs
Making things more complicated is the presence of two other funds: the Ark 21Shares Bitcoin ETF and the Grayscale Bitcoin Trust. Ark has plans to list on the CBOE BZX exchange, which had previously rejected its application, but recently renewed and was listed in the Federal Register on 5/15/23. The SEC postponed its decision – on the same day that BlackRock submitted S-1 and Nasdaq submitted 19b-4 (June 15) – but the exchange submitted a revised 19b-4 this time, including the spot Bitcoin SSA (Supervised Sharing Agreement), which was again seen as a key document in BlackRock’s application. The next reply deadline for Ark’s funds is August 13th, while the reply for BlackRock’s may come after that.
WEEX Wei Ke Note: Cryptocurrency trading product issuer 21Shares originally submitted a spot Bitcoin ETF application in May 2021 and May 2022, both of which were rejected. On April 25th of this year, 21Shares partnered with Ark Invest led by Cathie Wood and re-submitted a spot Bitcoin ETF application, with the application adding a Supervised Sharing Agreement between CBOE and crypto exchanges (possibly Coinbase), similar to the document in BlackRock’s application.
As for the Grayscale Bitcoin Trust (GBTC), there is a pending lawsuit between the SEC and Grayscale, with Grayscale suing regulators for denying its attempt to transform the fund into an ETF. On March 7th, a panel of three judges heard oral arguments and is expected to make a ruling this fall, with no specific date yet. Regardless of the outcome, both sides may appeal the ruling, delaying the final determination of whether GBTC can be converted to an ETF.
Regardless, BlackRock’s application news has brought traders’ expectations for the prospects of a spot Bitcoin ETF approval, causing the GBTC price to skyrocket. Before the application was submitted, GBTC’s trading price was discounted by 43.8% from the fund’s net asset value (NAV). As of last Wednesday’s close, this discount had narrowed to 31.6%, a change of +11.7%. In theory, if GBTC were to be converted to an ETF, considering the redemption and creation mechanisms associated with ETFs, its trading price should be close to its NAV.
WEEX Note: GBTC has traded above its NAV, with the highest premium appearing at the end of 2017 when the premium exceeded 130%. However, times have changed and GBTC began to experience a negative premium in early 2021. Grayscale also attempted to convert the GBTC into a Bitcoin ETF, but was rejected by the SEC.
Conclusion
While we understand the market’s enthusiasm for a long-awaited Bitcoin ETF, it is important to note that the road ahead is still long. Although the chances of success in this round of applications are greater than in the past, it is far from guaranteed. Just last week, the Wall Street Journal reported that the SEC had informed ETF applicants that their applications lacked clarity on SSA.
Given the advantage of “winner takes all” for pioneers, the recent competition for a Bitcoin ETF is to be expected. Looking at the experience of the Bitcoin Futures ETF (BITO), the first approved BITO controls 93% of the existing fund management size (AUM), which is $1.13B.
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