The recent application by BlackRock to launch a Bitcoin ETF has stoked expectations that the SEC will soon approve a product considered as essential to the expansion of the cryptocurrency market. But according to numerous market observers that CoinDesk spoke with, there are still a number of obstacles to overcome.
A flurry of applications for spot bitcoin ETFs were submitted by institutions to the SEC at the same time that BITX received clearance; these applications, including one from BlackRock, said that they would enter into a surveillance-sharing agreement with Coinbase. The entry of the largest asset manager in the world with more than $10 trillion in assets under management (AUM) reflected a « how-will-the-SEC-turn-this-financial-giant-down » and a « surely-BlackRock-is-filing-only-because-they-know-it’ll-eventually-happen » kind of market sentiment, as Bitcoin (BTC) briefly rose above $31,000 after the flurry of ETF filings.
According to Matt Hougan, chief investment officer of Bitwise Asset Management, you have to « listen » when BlackRock enters the market. Bitwise re-filed for a bitcoin spot ETF, similar to BlackRock. Additionally, brokerage company Bernstein raised hopes when it stated that although the SEC’s position on spot bitcoin (BTC) ETFs is a tough one to hold, there is a good chance that it would be approved.
The CEO and founder of Opimas LLC, Octavio Marenzi, and others, however, claimed that the application is already dead “They’ve identified a custodian for the assets that the SEC itself has said is operating illegally…I don’t quite see how BlackRock makes this happen, » Marenzi remarked.
One person who is well familiar with the procedure believes that no approvals will happen any time soon despite the fact that the crypto sector has been trying to create a spot bitcoin ETF for over a decade.
On June 27, Volatility Shares’ 2x Bitcoin Strategy ETF (BITX), which it carefully submitted to the SEC, became the first leveraged cryptocurrency ETF accessible in the United States. Chief Investment Officer Stuart Barton oversaw the application’s submission.
“The hold-up is because of the unregulated nature of the crypto exchanges,” according to Barton. “It takes a long time for an exchange to become regulated. That is a multiyear process. That’s a step before we get to an ETF approval. At the moment, there’s no exchange on which bitcoin trades that is regulated.”
The CEO of the cryptocurrency asset trading platform Blockstation, Jai Waterman, and hedge fund manager James Koutoulas, who is now battling the SEC’s petition to subpoena him over and a political meme coin targeting Joe Biden, were also interviewed by CoinDesk.
They both dismissed the notion that the U.S. would immediately approve a spot bitcoin ETF. Based on his current legal battle with the SEC, Koutoulas noted that while the cryptocurrency community’s excitement is warranted, he is unsure that it will be completely based on ultimate clearance.
The approval of an ETF is « not a given, » according to Koutoulas. « You only need to consider the conflicts (for instance, the lawsuit against Coinbase) for that. »With political pressure, Waterman acknowledged that the SEC is in a tough situation, but said that it is still « going to take a long time. »
As long as the Coinbase case is resolved or dropped, the ETFs won’t be permitted, according to Waterman. “They may transition and use somebody else instead of Coinbase but that’s also difficult because regulators will want an organization with strong credibility and no ongoing lawsuit against them.”
Larry Fink, CEO of BlackRock, appears to be convinced nevertheless. From suggesting that supporters of the asset class extensively utilized it for « illicit activities » to declaring that bitcoin might « revolutionize the financial system, » he has changed his position several times. However, a recent remark suggested that even he believed an ETF approval could take some time.
Fink stated earlier this month, “We hope that, like in the past, we could be working with our regulators and get the filing approved one day, and I have no idea what that one day will be, but we’ll see how that all plays out”.
XRP judgment increases pressure on the SEC
The XRP decision has reportedly increased pressure on the SEC in addition to the leveraged product’s clearance, BlackRock’s application, and the ensuing market confidence. A U.S. court partially sided with Ripple last week, finding that the selling of its XRP coins through algorithms and exchanges did not constitute an investment contract. The XRP decision may help Coinbase’s argument, according to Waterman. “That could be another point of pressure on top of these ETF applications. However, I do think the SEC will appeal the Ripple decision.”
The XRP verdict, according to Koutoulas, has delivered the SEC a very serious blow since it supports all of the arguments made by the community of crypto lawyers against the SEC’s overreach.
“Merely hours after their devastating loss in XRP … the SEC rushed into court to harass me with a subpoena, admitting ‘the question of whether or not our political meme-coin is a security is for another day,” “Clearly this subpoena isn’t about a legitimate investigation, it’s about weaponizing the federal government against cryptocurrency and political opponents.”
Comparing leveraged and spot Bitcoin ETFs
The SEC came under greater pressure when Barton’s leveraged bitcoin-based ETF was approved and Grayscale’s spot bitcoin ETF application was denied, according to attorneys for cryptocurrency asset management Grayscale. They claimed in a letter to the U.S. Court of Appeals for the District of Columbia Circuit that Grayscale’s own spot bitcoin ETF was « even riskier » than a leveraged ETF that the SEC had authorized. In response to the SEC’s denial of Grayscale’s application for an exchange-traded fund to hold spot bitcoin, Grayscale has filed a lawsuit. The parent business of CoinDesk and Grayscale is the Digital Currency Group.
A leveraged ETF and a spot-bitcoin ETF approval processes, according to Barton, simply follow different procedures. He explained that
“The difference between our leveraged ETF and a spot-bitcoin ETF is that our ETF tracks bitcoin futures that trade on a regulated exchange, the Chicago Mercantile Exchange (CME), but the proposed bitcoin spot-ETF plans to reference bitcoin cash which is not traded on any regulated exchange”.
‘Methodology is extremely hard’
According to Barton, the 19b-4 listing requirement gives the SEC a very strong position due to the technique used to approve spot-bitcoin ETFs. Before changing the trading regulations, self-regulated firms are required under the rule to get the SEC’s permission. Since Coinbase, the selected surveillance partner, is an unregulated exchange, it does not meet the SEC’s criteria. NASDAQ and the Cboe’s BZX Exchange are requesting to assume compliance obligations in this situation. A surveillance-sharing arrangement is being sought by NASDAQ and Cboe BZX in order to help Coinbase comply with some of the new rules. As an unregulated exchange up to this point, Coinbase does not currently meet SEC regulations.
Barton said
“The challenge of an ETF application that needs a 19b-4 is that the exchange needs a specific approval ruling from the SEC to list, and that puts the SEC in a very powerful position”. “The exchanges don’t only have to argue that the ETF falls under a certain set of ETF rules, but also have to answer a far broader set of questions from the SEC because they’re really asking them ‘please can we change the rules of our exchange in order to list this new product as a new ETF’ and very few 19b-4s get filed and can be a very long process.”
The 19b-4 applications for all five of Cboe’s ETF proposals—Wise Origin, WisdomTree, VanEck, Invesco Galaxy, and ARK 21Shares—as well as BackRock’s iShares Bitcoin Trust—have been submitted. « The weakness of an application that needs 19b-4 is that you need a specific approval ruling to list from the SEC and that puts the SEC in a very powerful position, » explained Barton. « They don’t need to debate your point of view on whether this is a wise investment. They get to go further because, in reality, you’re asking them to « plz can we change the rules of our exchange to list this new underlying product as a new ETF, » and filing a 19b-4 is a highly time-consuming process.
If anyone, BlackRock will be it
Experts said that while it would take time—possibly longer than the crypto community anticipates—BlackRock will be best positioned to win the ETF race.
BlackRock will be approved if anyone, according to Koutoulas. « (Because) BlackRock’s track record of having about 500 ETF applications approved and only one permanently rejected, and that the U.S. government does so much business with BlackRock. »
