Abstract: Given the "winner takes all" advantage of the first mover, the recent spot Bitcoin ETF competition is reasonable. Judging from the experience of the Bitcoin Futures ETF (BITO), the first approved BITO controls 93% of the existing fund management scale (AUM), or $1.13B.

Read the summary:

1. BlackRock opens a new spot Bitcoin ETF competition and outlines the subsequent review steps.

2. Recently filed filings do not yet have a response deadline because the exchange’s proposed rule changes have not yet been published in the Federal Register.

3. While approval of BlackRock’s application is far from certain, its filing has a knock-on effect on other financial products, such as the Grayscale Bitcoin Trust and the Ark 21Shares Bitcoin ETF.

BlackRock Tries to Launch Spot Bitcoin ETF

On June 15, BlackRock, a major sponsor of exchange-traded funds (ETFs), launched the approval process for the spot Bitcoin ETF, iShares Bitcoin Trust, which manages $2.4T in ETF products. BlackRock submitted the fund's registration statement (S-1) to the U.S. Securities and Exchange Commission (SEC), and Nasdaq Stock Market LLC (Nasdaq) submitted a 19b-4 filing, which requires the SEC to change its rules to list and trade spot Bitcoin ETFs. To list a new ETF, the exchange needs to obtain an exemption from the SEC, but so far, the SEC has refused to provide an exemption for spot Bitcoin ETFs, making it impossible to provide it to investors.

The filing for a spot Bitcoin ETF is notable because BlackRock has a near-perfect record of getting ETF approvals (255 out of 256), which contrasts with the SEC’s rejections of spot Bitcoin ETFs (28 out of 28). Investors viewed the industry giant’s filing as a positive sign, and Bitcoin prices rose more than 20% after the news (data from the WEEX trading platform showed that BTC rose 10.28% on June 21 and 19.06% from June 16 to 23). While BlackRock’s latest filing attempts to address deficiencies in previous filings through a Supervisory Sharing Agreement (SSA), a collaboration between an unnamed cryptocurrency exchange (reportedly likely to be Coinbase) and Nasdaq to detect and prevent fraudulent and manipulative trading practices, this does not guarantee success.

WEEX Note: SSA (Surveillance Sharing Agreement) is designed to increase the effectiveness of financial market monitoring, especially when it comes to financial products such as ETFs. The agreement establishes a partnership that allows exchanges and regulators to share information and data to better monitor market manipulation, fraud and other improper trading practices.

This article is not intended to defend the positions of either side in this regulatory game, but rather we think it may be more meaningful to outline the steps the application process will take and the impact on spot Bitcoin and other financial products.

Review Process Overview

The birth of a spot Bitcoin ETF begins with the filing of a registration statement with the SEC using Form S-1 (under the Securities Act of 1933). It is important to note that this is a different process than (most) ETFs previously approved in the US, such as the popular ProShares Bitcoin Strategy ETF (BITO), which holds Bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME) and filed a Form N-1A registration statement (under the Investment Company Act of 1940). 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 the application of fund issuers Teucrium and NYSE Arca to issue Bitcoin futures ETFs, allowing Teucrium to join the ranks of Bitcoin futures ETFs of ProShares, Valkyrie and VanEck. But unlike the others, Teucrium applied based on the Securities Act of 1933, not the Investment Company Act of 1940.

As is customary, after filing a registration statement with the SEC, the stock exchange that intends to trade the ETF files a proposed rule change on Form 19b-4 to apply for an exemption from the SEC. As mentioned earlier, exchanges need to obtain an exemption from the SEC to list new ETFs. Typically, there is a delay between filing a registration statement and a 19b-4, but in the case of the BlackRock iShares Bitcoin Trust, they were filed on the same day, perhaps to take advantage of the filing news, or perhaps prompted by CoinDesk's early morning news on June 15. Currently, all outstanding spot ETF applications propose to trade on one of three exchanges: Nasdaq, CBOE BZX, or NYSE Arca.

There is currently no clear timeline for the approval of BlackRock ETFs

As is customary, after an exchange publishes a 19b-4 (on its website), the SEC posts a notice on its website seeking comment on the proposed rule change, along with a summary of the proposal. Again, there can be a delay of several days between the filing of the 19b-4 and the filing of the notice.

It is important to note that after all of these documents have been submitted, the clock for approval or rejection has not yet started. This is a common misconception.

The countdown for the SEC to respond to the exchange's proposed rule change only begins when the SEC's filing notice is published in the Federal Register, the official gazette of the U.S. government that contains government agency rules, proposed rules, and announcements, rather than when the 19b-4 is submitted (see "Registration, Responsibility, and Supervision of Self-Regulatory Organizations" at 78 U.S.C., WEEX Weike Note). Once the filing notice is published in the Federal Register, the 240-day clock starts ticking, with response deadlines at intervals of 45 days, 45 days, 90 days, and 60 days (in that order).

The SEC can delay making a decision on an ETF application up to three times to seek comments or provide more information before making a final decision on whether to approve or reject a rule change. It has the power to approve or reject an application at any time during the process, but historically, all applications that have included cash ETFs have gone through the majority of the 240-day process before they were ultimately rejected. So there is an argument to be made that if the SEC delays making a decision on the BlackRock ETF’s first response deadline (which currently has no set date), that means the application will ultimately be rejected. That may be true, but there are exceptions, as the Teucrium ETF went through almost the entire 240-day process, including three delays, but was ultimately 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 time of writing, it has not yet been published, so the timeline for the approval/rejection/delay process is currently unclear.

GBTC's negative premium narrows, and other funds are competing to apply

Further complicating matters is the existence of two other funds: the Ark 21Shares Bitcoin ETF and the Grayscale Bitcoin Trust. The Ark fund, which plans to list on the CBOE BZX exchange, was previously rejected but recently reapplied and was listed in the Federal Register on 5/15/23. The SEC delayed its decision — on the same day that BlackRock filed its S-1 and Nasdaq filed its 19b-4 (June 15), but the exchange filed an amended 19b-4 this time, which includes the Spot Bitcoin SSA (Supervision Sharing Agreement), which is again seen as key to BlackRock's filing. The next SEC response deadline for the Ark fund is August 13, and the response for BlackRock is likely to come after that.

WEEX Note: 21Shares, the issuer of cryptocurrency trading products, initially submitted spot Bitcoin ETF applications in 2021 and May 2022, both of which were rejected. On April 25 of this year, 21Shares, in cooperation with Ark Invest led by Cathie Wood, resubmitted the spot Bitcoin ETF application. The application submitted this time added a supervisory sharing agreement between CBOE and a crypto exchange (possibly Coinbase), which is similar to the application filed by BlackRock.

As for the Grayscale Bitcoin Trust (GBTC), there is pending litigation between the SEC and Grayscale, which sued the regulator for rejecting its attempt to convert the fund into an ETF. On March 7, a panel of three judges heard oral arguments and is expected to make a ruling this fall, but the exact date is not yet clear. Regardless of the outcome, both parties may appeal the ruling, delaying the final determination of whether GBTC can be converted into an ETF.

Regardless, the news of BlackRock's filing gave traders hope for the prospect of a spot Bitcoin ETF approval, causing GBTC prices to surge. Prior to the filing, GBTC was trading at a 43.8% discount to the fund's net asset value (NAV). As of last Wednesday's close, that discount narrowed to 31.6%, a change of +11.7%. In theory, if GBTC is able to be converted into an ETF, it should trade close to its NAV, given the redemption and creation mechanisms associated with the ETF.

WEEX added: GBTC used to trade above NAV, with the highest premium occurring at the end of 2017, when the premium exceeded 130%. However, times have changed, and in early 2021, GBTC began to enter a negative premium. Grayscale also tried to change this GBTC to a spot Bitcoin ETF, but was rejected by the SEC.

Conclusion

While we understand the market's enthusiasm for the long-sought-after spot Bitcoin ETF, it is important to note that there is still a long way to go. While this round of applications has a greater chance of success than previous ones, it is far from guaranteed. Just last week, the Wall Street Journal reported that the SEC had informed ETF filers that their applications lacked clarity regarding SSA.

Given the "winner takes all" advantage of the first mover, the recent spot Bitcoin ETF competition is understandable. Judging from the experience of the Bitcoin Futures ETF (BITO), the first approved BITO controls 93% of the existing fund management scale (AUM), or $1.13B.