The encryption industry is currently facing one of the toughest regulatory periods to date, and BlackRock, the world’s largest asset management company, may be the “savior” of the industry, providing unexpected gains for some participants. Matt Hougan, Chief Investment Officer of Bitwise Asset Management, commented in a tweet: “The future of cryptocurrency is more about BlackRock than Binance.”
BlackRock’s New Initiative
The US Securities and Exchange Commission (SEC) has rejected all previous applications for spot Bitcoin ETFs, including those from Fidelity, CBOE Global Markets, and NYDIG. Recently, it defended itself in a lawsuit filed by Grayscale Investments, which operates the Grayscale Bitcoin Trust (GBTC) worth $17.5 billion, and has been seeking to convert it into an ETF.
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The trading price of GBTC has always had a large negative premium compared to its bitcoin value, averaging about 40% this year. The conversion will allow traders to arbitrage, releasing billions of dollars in value.
Since BlackRock submitted its filing, the negative premium on GBTC has shrunk from around 44% in mid-last week to around 34% currently, indicating that investors believe there is a greater likelihood of success in converting to an ETF. Bitwise Asset Management and WisdomTree have also followed suit and submitted similar applications.
It is not easy to change the SEC’s mind, but there is some reason to be optimistic. At first glance, BlackRock’s proposal is broadly similar to previous proposals, namely to create a trust that holds bitcoin and can create and redeem shares in exchange for bitcoin, similar to how physical commodity ETFs work, such as those for gold.
But BlackRock’s application has at least one thing to commend it: on page 36 of its 19b-4 filing, the company states that to mitigate market manipulation, it will introduce a supervisory sharing agreement with Nasdaq and the operators of bitcoin spot trading platforms. The supervisory sharing agreement allows for the sharing of information about market trading activity, clearing activity, and customer identities, meaning that exchanges can obtain confidential information about buyers, sellers, and prices, and the likelihood of market manipulation is almost zero.
Polymesh Association’s tokenization head, Graeme Moore, stated that the monitoring sharing agreement proposed by BlackRock, called “Spot BTC SSA,” makes the application stand out and highly likely to be approved.
The potential manipulation of the spot bitcoin price is an important reason why the SEC has so far refused bitcoin ETF applications. If this monitoring sharing platform is Coinbase, it could be significant, as Coinbase is one of the exchanges for the CME CF Bitcoin Reference Rate, which BlackRock’s ETF will use.
Will BlackRock’s application be sufficient to convince the SEC to make a different decision? The unresolved question is how regulatory agencies evaluate whether the market in question is “large enough” or whether it is a sufficiently “regulated market,” apart from the issue of futures and spot.
It may be rash to blindly bet on BlackRock’s approval of a spot bitcoin ETF, but if it is approved, it will have a huge impact on the struggling cryptocurrency industry.
Once BlackRock’s spot ETF successfully passes, other ETFs can use the same mechanism. If the exchange successfully applies for listing a spot bitcoin ETF, the process is usually easier for other exchanges. Grayscale may lose some market share, but will benefit from its leading advantage. However, more directly, GBTC holders will benefit from the end of negative premiums, and a wider user base may also push up bitcoin prices.
Another winner may be Coinbase. On the one hand, an easy-to-trade spot ETF may take some market share among retail investors, who may otherwise register to trade cryptocurrencies on their platform. On the other hand, Coinbase is also the custodian of the Bitcoin trust drafted by BlackRock and Grayscale, and earns fees as a result – this is a more stable source of income than fee based on trading volume, and institutional business is also expected to become the center of market makers trading around spot ETFs.
Traditional institutions “grabbing food”?
Although the entry of large-scale and strictly regulated traditional institutions into cryptocurrency seems to be good news, not everyone is optimistic about this. Concerns about “malicious acquisitions” and handing over keys (whether symbolic or encrypted) to institutions are spreading in the community.
Mark Yusko, founder of Morgan Creek Capital Management, said that the institutional-scale cryptocurrency custody tool Xapo, which Coinbase acquired in 2019, could become a regulatory “white glove.” He tweeted: “What if BlackRock took over Xapo? If they had most of the funds, regulators could shut down the Coinbase exchange, the SEC would label it an ‘unlicensed casino,’ and transfer the Xapo division to BlackRock.”
Some believe that the collective layout of large financial institutions in the cryptocurrency business is no coincidence. Caitlin Long, a Wall Street veteran and CEO of digital asset bank Custodia Bank, wrote: “Suddenly, these Wall Street giants are entering the cryptocurrency field after the runway has been cleared, and it’s hard not to associate it with something else.”
Long cited the SEC’s lawsuit against Coinbase this month as a typical example of law enforcement action, suspecting that it may clear the way for the launch of the new exchange EDX.
Investor Adam Cochran commented in a tweet: “BlackRock, Citadel, Deutsche Bank, and Nasdaq have all started to enter the cryptocurrency field. They bully the participants so they can grab cheap tokens. The development trajectory of cryptocurrencies has never been so clear.” He said that regulators are more inclined to allow old companies to enter the cryptocurrency field rather than accepting companies that focus on digital assets from the beginning.
The Twitter account @The Wolf Of All Streets, which has more than 900,000 followers, said: “They don’t want to kill cryptocurrency. They just want to kill the current cryptocurrency industry and hand it over to their cronies. Citadel, BlackRock, JPMorgan…”
It is worth noting that the SEC has not provided any official timetable for approving BlackRock’s Bitcoin ETF or any other pending ETF proposals. Its approval process is not entirely transparent, and if the proposal is approved, it may take several months or even years. Sumit Roy, senior analyst at ETF.com, said in his blog post that even if BlackRock has hopes of getting insider information, the entire process will be quite complicated, given that Coinbase has been sued and the SEC’s trial date with Grayscale is approaching.
Can BlackRock ultimately bring huge adoption to Bitcoin? It is difficult to predict under the current regulatory haze, but at present, this Wall Street giant undoubtedly has the highest chance of winning.
Author: BlockingBitpushNews Mary Liu