Excitement over the approval of a spot Bitcoin exchange-traded fund has returned. This time, financial giant BlackRock has joined the ETF race, raising hopes that the U.S. Securities and Exchange Commission will approve the long-awaited product a decade after the crypto industry first sought to launch a Bitcoin ETF.

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Spot ETF Hope

Narrative

Cameron and Tyler Winklevoss filed to launch the first Bitcoin exchange-traded fund (ETF) in July 2013. Eleven years later, the industry is still waiting for a spot Bitcoin product.

Why this matters

A Bitcoin ETF, if approved, would allow a broad swath of U.S. retail investors to invest in Bitcoin as an asset without having to go through the hassle of setting up a wallet or dealing with sometimes finicky cryptocurrency exchanges. Additionally, sophisticated investors like multi-million dollar family offices would be able to invest in a regulated (and therefore “safe”) Bitcoin product. These are some of the reasons advocates want to see an ETF approved by the SEC.

Break it down

More than two years ago, the Ontario Securities Commission approved the first North American bitcoin exchange-traded fund, raising hopes that U.S. products might soon be approved, too. Later in 2021, the U.S. Securities and Exchange Commission approved the first bitcoin futures ETF, opening the door for several other similar products.

As of now, there are still no spot Bitcoin ETFs trading in the U.S., but BlackRock’s filing a few weeks ago signaled to the industry that this may be changing. In the past few weeks, we have seen six new applications for Bitcoin spot ETFs in the U.S. Has the market developed enough to support an ETF, and can the company provide enough assurances to the SEC to ensure the safety of the ETF?

The main difference we are seeing now is that these applicants are spending more time talking about their surveillance sharing agreements (with some prompting from the SEC). Coinbase will be the marketplace for all of the major potential ETF issuers that have identified partners so far, namely Nasdaq and Cboe BZX on behalf of BlackRock, Fidelity, VanEck, and others.

The SEC has proposed surveillance-sharing agreements in the past. In 2019, the regulator issued a 112-page order explaining its rejection of Bitwise’s Bitcoin ETF application, saying that the Bitcoin market presented too much potential for manipulation and required a “surveillance-sharing agreement” with a larger regulated market “related to the underlying asset” to thwart any potential manipulation.

James Seyffart, an analyst at Bloomberg Intelligence who has been following bitcoin ETF applications for years, said one problem is that there is no clear definition of what constitutes a large, regulated market.

“Usually every time they delay and then deny, they sometimes make comments along the way,” Seifat said. “Some of this will be done behind closed doors ... Some of this will undoubtedly happen.”

Coinbase is far and away the largest cryptocurrency exchange in the U.S. According to Coingecko, it has more than twice the overall 24-hour volume (when normalized) compared to its closest competitor, Kraken. Most of that appears to come from the bitcoin market.

The SEC has even acknowledged Coinbase’s role in the U.S., calling it “one of the largest crypto asset trading platforms in the world and the largest in the U.S.” in its lawsuit against the exchange.

The SEC’s lawsuit against Coinbase has nothing to do with its Bitcoin market, which I guess is one of the reasons these companies sought out the exchange as a partner in their surveillance-sharing agreements.

The unanswered question is whether the SEC will approve Coinbase operating a regulated bitcoin marketplace of any size, and whether approval is necessary.

Last year, regulators did not seem to believe that there was any regulated market for Bitcoin. Specifically, when approving Teucrium’s Bitcoin futures ETF in April 2022, the SEC wrote in a footnote that “the spot Bitcoin market is not currently ‘regulated,’” explaining why the oversight-sharing agreement for the Bitcoin futures market would not apply to spot ETFs.

Meanwhile, the BlackRock/Nasdaq filing argues that there doesn’t need to be a significant, regulated market in the first place, and points to past instances in which ETFs have been rejected.

“The large regulated markets test does not require that the spot bitcoin market be regulated in order for the Commission to approve this proposal, and precedent makes it clear that the underlying market for a spot commodity or currency that is a regulated market would in fact be an exception to the norm,” the document said. “These largely unregulated currency and commodity markets do not offer the same protections as markets that are overseen by the Commission, but the Commission has been looking at oversight-sharing agreements with underlying futures markets to determine whether such products comply with the Act.”

The filing said the bitcoin futures market should be large enough to meet the SEC’s “significant scale” test.

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this week

Tuesday

  • At 13:30 UTC (2:30 pm BST) the UK Parliament gave the third reading to a bill that would give law enforcement agencies greater powers over cryptocurrencies.

Thursday

  • The judge overseeing the Genesis bankruptcy case is due to make a decision on the FTX claim today at 15:00 UTC (11:00 a.m. ET).

Friday

  • The U.S. Securities and Exchange Commission (SEC) has until today to respond to a letter from the cryptocurrency company in its ongoing lawsuit against Coinbase.

elsewhere: