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Will we witness a wave of spot Bitcoin exchange-traded funds (ETFs)? If you have been in the cryptocurrency industry for a while, you will know that ETFs have always been seen as key to establishing a broad market for digital assets. Recently, even major institutions, including BlackRock, have submitted proposals to establish such tools, sparking hope. If leading institutions like BlackRock enter the Bitcoin ETF market, the first cryptocurrency ETF in the United States is not far away.
However, according to some experts contacted by CoinDesk, we may still have to wait for some time.
Just as BITX was approved, some institutions submitted a series of applications to the SEC regarding spot Bitcoin ETFs, stating that they will reach a monitoring sharing agreement with Coinbase, including an application from BlackRock. Bitcoin (BTC) briefly surged to over $31,000 after the increase in ETF applications, solely because of the entry of BlackRock, the world’s largest asset management company managing over $10 trillion in assets. This reflected the market sentiment of “how could the SEC reject this financial giant” and the view that “without a doubt, BlackRock only submitted the application because they knew it would eventually be approved”.
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Matt Hougan, Chief Investment Officer of Bitwise Asset Management, told CoinDesk TV: “When BlackRock enters the market, you have to ‘listen’.” Like BlackRock, Bitwise has also resubmitted its application for a Bitcoin spot ETF. And brokerage firm Bernstein also mentioned that it is difficult for the SEC to maintain its position on spot Bitcoin (BTC) ETF and the probability of approval is quite high.
However, Octavio Marenzi, CEO and founder of Opimas LLC, and others believe that the application is destined to not be approved. “They have identified a custodian that the SEC itself has deemed to be operating illegally… I don’t quite understand how BlackRock is making this a reality,” said Marenzi.
Since the cryptocurrency industry first sought to launch spot Bitcoin ETFs, ten years have passed. A person familiar with the process believes that there will be no approval in the short term.
The 2x Bitcoin Strategy ETF (BITX) of Volatility Shares became the first leveraged cryptocurrency ETF available in the United States on June 27, and Stuart Barton, Chief Investment Officer of the SEC, was responsible for carefully submitting the application.
Barton said: “The delay is due to the unregulated nature of cryptocurrency exchanges. It takes a long time for an exchange to become a regulated exchange. This is a process that takes years. It is a step before the ETF is approved. Currently, no Bitcoin exchange is regulated.”
CoinDesk also interviewed two other industry experts – traditional hedge fund manager James Koutoulas, who is currently fighting against the SEC’s subpoena (involving a political memecoin targeting Joe Biden and Jai Waterman), and Jai Waterman, CEO of the cryptocurrency trading platform Blockstation.
Both of them expressed doubts about the immediate approval of a Bitcoin ETF in the United States. Based on Koutoulas’ experience in ongoing legal disputes with the SEC, he said that while the optimism of the crypto community is reasonable, he is unsure if it will ultimately receive 100% approval.
“Whether the ETF will be approved is not a done deal,” Koutoulas said. “You just need to look at these conflicts, such as the lawsuit against Coinbase.” Waterman said that the SEC is in a dilemma and faces political pressure, but it will “take a long time.”
“The ETF will not be approved until the lawsuit against Coinbase is resolved or abandoned,” Waterman said. “They may turn to other institutions instead of Coinbase, but that is also difficult because regulatory agencies want to find an institution with a good reputation and no ongoing litigation.”
However, Larry Fink, CEO of BlackRock, seems to have firm belief in this. He not only said that the enthusiasts of asset classes rely heavily on it for “illegal activities,” but also stated that Bitcoin may “change the financial system.” But his recent comments indicate that even he believes that the approval of the ETF will take time.
“We hope that, as in the past, we can work with regulatory agencies and eventually obtain approval. I don’t know when that day will come, but we will see how the situation develops,” Fink said earlier this month.
According to experts, in addition to approving leveraged products, BlackRock’s application and subsequent market optimism, the ruling on XRP has also put collective pressure on the SEC. Last week, a US court ruled in favor of Ripple, stating that Ripple’s XRP token sales on exchanges and through algorithms do not constitute investment contracts. “The ruling on XRP may support Coinbase’s case,” Waterman said. “This may be another pressure point in addition to these ETF applications. However, I believe the SEC will appeal the ruling on Ripple.”
Koutoulas said that the ruling on XRP dealt a serious blow to the SEC because it confirmed everything the crypto legal community has been arguing against the SEC’s excessive intervention. “Within hours of suffering significant losses on XRP, the SEC hastily harassed me with a subpoena, admitting ‘the question of whether our memecoin is a security will be decided at another time’,” Koutoulas quoted the SEC’s subpoena.
“It is obvious that this subpoena does not involve a legitimate investigation, but rather weaponizes the federal government for use against cryptocurrencies and political opponents.”
A lawyer from the cryptocurrency asset management company Grayscale criticized the regulatory agency for approving Barton’s leveraged Bitcoin ETF after rejecting its application for a spot Bitcoin ETF, putting more pressure on the SEC. They wrote a letter to the District of Columbia Circuit Court of Appeals, alleging that the leveraged ETF approved by the SEC is “even more dangerous than Grayscale’s own spot Bitcoin ETF”. Grayscale has filed a lawsuit against the SEC regarding the denial of its spot Bitcoin ETF application. (Note: Grayscale is a subsidiary of DCG and the parent company of CoinDesk.)
Barton stated that the process of approving leveraged ETFs and spot Bitcoin ETFs is different. “The difference between our leveraged ETF and spot Bitcoin ETF is that our ETF tracks Bitcoin futures traded on the regulated exchange, the Chicago Mercantile Exchange (CME), while the proposed spot Bitcoin ETF plans to reference Bitcoin cash that does not trade on any regulated exchange,” explained Barton.
Barton stated that the methodology for approving spot Bitcoin ETFs is very difficult because there is a listing rule, Rule 19b-4, which requires self-regulatory entities to seek approval from the SEC before making any changes to trading rules. In this case, the BZX exchange of Nasdaq and the Chicago Options Exchange are seeking to take over compliance responsibilities because the selected monitoring partner, Coinbase, is an unregulated exchange that does not meet the SEC’s requirements. As part of this rule change, Nasdaq and Cboe BZX plan to fulfill some of Coinbase’s compliance obligations through a monitoring sharing agreement. Coinbase is currently an unregulated exchange and does not meet the SEC’s requirements.
“One challenge of an ETF application that requires Rule 19b-4 is that the exchange needs specific approval from the SEC to list it, which puts the SEC in a very powerful position,” said Barton.
“The exchange not only needs to prove that the ETF complies with a set of ETF rules, but also needs to answer a broader range of questions from the SEC, because they are essentially asking them, ‘Please allow us to change the exchange rules to list this new product as a new ETF,’ and very few 19b-4s have been submitted, so it is a very lengthy process.”
Cboe’s five ETF applications – Wise Origin, WisdomTree, VanEck, Invesco Galaxy, and ARK 21 Shares, as well as BlackRock’s iShares Bitcoin Trust – have all submitted 19b-4 applications. “One weakness of an application that requires a 19b-4 is that you need specific approval from the SEC to list it, which puts the SEC in a very strong position,” Barton said. “They don’t have to argue with you whether this is a good investment. They can dig deep because you are actually asking them, ‘Please allow us to change the exchange rules to list this new underlying product as a new ETF,’ and very few 19b-4s have been submitted, so it is a very lengthy process.”
Usually, when confronted with regulatory authorities, you would try to choose the simplest path, which is a very difficult market road. When asked why BlackRock applied, despite the difficulties, Barton said that BlackRock hopes to be the first to convey the pressure to the SEC.
“If anyone can get approval, it’s BlackRock.” Koutoulas said. “This is because BlackRock has already obtained approval for about 500 ETF applications, with only one permanent rejection, and the U.S. government has conducted a large amount of business with BlackRock.”
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