Recently, a series of traditional financial companies have entered the cryptocurrency market, but most have chosen the path of Bitcoin ETFs. So why do funds choose to register ETFs at this time?
In June, the cryptocurrency market saw five major Bitcoin ETF registrations, including BlackRock, Fidelity, Fathom, WisdomTree, and Valkyrie, prompting an exclamatory tweet from Binance’s CEO.
In early 2023, the U.S. Securities and Exchange Commission (SEC) sued two of the top exchanges in the crypto market, Gemini and Genesis (according to Coingecko data), alleging a lack of liquidity and affecting investors. Even at the time, the lawsuit was considered the end of Genesis.
Five months later, the SEC sued Binance US and Coinbase, alleging that they illegally listed tokens designated as securities, as well as 13 other legal issues. Many exchanges such as eToro and Robinhood decided to delist tokens that were considered securities to avoid attracting the attention of the SEC.
These problems are caused by the lack of laws in the cryptocurrency field. Although the regulatory policies are still unclear, traditional giants have not stopped submitting applications to open Bitcoin exchange-traded funds (ETFs).
Why the SEC once rejected a Bitcoin ETF
It was the Winklevoss brothers, the founders of Gemini, who applied for a Bitcoin ETF in 2013, when the price of Bitcoin was only around $1,000 and the market capitalization was relatively low.
The SEC also realized that the cryptocurrency market is small and easy to manipulate, so it refused to register an ETF. Another similar case is Grayscale, an investment fund owned by DCG, which was also rejected in 2022 due to insufficient market liquidity and failure to meet SEC standards.
At this time, the community is abuzz with the news that BlackRock is expected to become one of the first spot Bitcoin exchange-traded funds (ETFs) in the United States.
According to Simon Dixon Twitt, an investor with 14 years of investment experience, BlackRock's registration success is due to the excellent work of Coinbase and Nasdaq, which became BlackRock's cryptocurrency trading regulatory partners.
Bloomberg believes that BlackRock has a high chance of success. Specifically, Bloomberg analyst James Seyffart said in an interview with the cryptocurrency website Unchained that the trillion-dollar investment fund has found a "small path" under the huge pressure from the U.S. Securities and Exchange Commission (SEC), although he still doesn't know what that path is.
Why Are Big Companies Choosing Bitcoin Exchange-Traded Funds (ETFs) Now?
First, let’s talk about the difference between futures ETFs and spot ETFs. For futures ETFs, investors participate in long and short transactions of Bitcoin through futures contracts, which has little impact on the market.
Spot ETFs allow users to invest directly in Bitcoin, which results in investment funds having an impact on the actual value of BTC. Therefore, this is also the ambition of many investment funds to participate in Bitcoin ETFs, hoping to get the biggest piece of the pie in this market.
Many theories have been proposed from the community, but some are more relevant, namely that traditional businesses see the crypto market as a lucrative piece of cake that they want to be a part of.
First look at BlackRock. According to Coindesk, this multi-billion dollar investment fund has a very large customer base. If they want to make more profits from these customers, BlackRock must provide more services to attract customers to invest money.
Coindesk added that although applications for Bitcoin ETFs have been rejected multiple times, the shortest path to bring customers into the crypto space is still through Bitcoin ETFs. Therefore, BlackRock is doing its best to enter the crypto space.
BlackRock’s market participation has received strong support from the community, but there are mixed opinions on it. Wendy O, an account on Twitter tracked by CZ, claimed that BlackRock is trying to monopolize the U.S. crypto market through a central bank digital currency (CBDC).
To make it easier to understand, according to Wendy, Bitcoin exchange-traded funds (ETFs) allow users to invest in Bitcoin without actually owning BTC, instead, they will receive a "certificate" for their investment. Therefore, BlackRock has full ownership of the assets and restricts users' trading activities. This contradicts the core decentralized element of blockchain.
According to Steven Lubka of Swan Bitcoin, BlackRock is likely to use its position to push for a “fork” from Bitcoin, similar to Bitcoin Cash.
If this “fork” is successful, Lubka believes that BlackRock will be able to control the price because they are the ones who created the fork and hold the client assets, not the investors.
This is one of the reasons why many well-known companies have registered under BlackRock's Bitcoin ETF. Perhaps they don't want BlackRock to dominate the US cryptocurrency market.
Finally, why are traditional companies getting involved now?
In response to Blockwork, Sei Labs founder Jeff Feng said that large funds have realized the long-term potential of blockchain.
In addition, in March 2023, Larry Fink, CEO of BlackRock, proposed that “token securitization” will be the future trend of blockchain. Therefore, BlackRock may enter the crypto market because the SEC is fulfilling BlackRock’s wish to mark hundreds of tokens as securities.
In line with the above view, Roger Bayston of investment fund Franklin Templeton also believes that converting tokens into securities will make traditional companies more accessible. As a result, more funds will flow into the crypto market.
Even according to Mr. Zheng, the founder of Pleiades Fund, there are two reasons why most traditional companies ignore legal issues and enter the crypto market.
The first reason is that the SEC is gradually clarifying the definitions of security tokens and commodity tokens. If there is a clearer regulatory framework in this regard, traditional companies will participate in blockchain on a large scale.
Second, traditional companies can reduce the impact of the law on themselves by cooperating with crypto businesses.
For example, BlackRock applied to become a Bitcoin ETF, but the success rate was low because the SEC had previously rejected many large companies from becoming ETFs. Therefore, in order to increase the approval rate, BlackRock cooperated with Coinbase to store Bitcoin assets.
