The excitement over the hoped-for approval of a spot Bitcoin exchange-traded fund is back. This time around, financial giant BlackRock’s entry into the ETF race has raised hopes that the Securities and Exchange Commission will approve the long-awaited product, a decade after the crypto industry first attempted to launch a Bitcoin ETF bring.
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In July 2013, Cameron and Tyler Winklevoss applied to launch the first Bitcoin exchange-traded fund (ETF). Eleven years later, the industry is still waiting for a spot Bitcoin product.
A Bitcoin ETF, if approved, would allow a wide range of retail investors in the US to use Bitcoin as an asset without the hassle of setting up a wallet or dealing with sometimes tricky crypto exchanges. Additionally, sophisticated investors such as multi-million dollar family offices could invest in a regulated (and therefore “safe”) Bitcoin product. These are some of the reasons why proponents want an ETF approved by the Securities and Exchange Commission.
Currently, there is still no spot bitcoin ETF trading in the US, but BlackRock’s filing a few weeks ago signaled the industry that the time might come when that could change. Over the past few weeks, we’ve seen half a dozen new applications for a spot bitcoin ETF in the US. Has the market evolved enough to support an ETF, and can companies give the SEC enough assurances that an ETF is safe?
The biggest difference we see now is that these applicants spend more time talking about their surveillance sharing arrangements (with some suggestions from the SEC). Coinbase will be the marketplace for all major potential ETF issuers that have identified a partner so far – namely Nasdaq and Cboe BZX on behalf of BlackRock, Fidelity, VanEck and others.
The SEC has in the past raised agreements to share surveillance measures. In 2019, the regulator released a 112-page order justifying its rejection of a Bitwise bitcoin ETF application, stating that the bitcoin market had too much potential for manipulation and that a “monitor-sharing agreement with a regulated market of significant size needed to be reached.” “ be closed in relation to the underlying assets” to prevent possible manipulation.
One problem is that there’s no clear definition of what constitutes a sizable regulated market, said James Seyffart, an analyst at Bloomberg Intelligence who has been following bitcoin ETF applications for years.
“Usually they delay all the time every time and then reject it. Sometimes they make comments,” said Seyffart. “Some of this will happen behind closed doors … some of this will undoubtedly happen.”
Coinbase is undoubtedly the largest US crypto exchange. Overall, it has more than double the 24-hour trading volume (when normalized) compared to its closest competitor, Kraken, according to CoinGecko. The bulk of this appears to be coming from the bitcoin market.
The SEC even acknowledged Coinbase’s role in the US in its lawsuit against the exchange, saying that it is “one of the largest crypto-asset trading platforms in the world and the largest in the United States.”
The SEC’s lawsuit against Coinbase has nothing to do with their bitcoin market, which I suspect is also one of the reasons these companies view the exchange as their oversight sharing agreement partner.
The open question is whether the SEC will allow Coinbase to operate a substantial-sized regulated bitcoin market — and whether that’s required for approval.
Last year, regulators seemed unconvinced that there was a regulated market for bitcoin. Notably, when the SEC approved Teucrium’s bitcoin futures ETF in April 2022, it wrote that “the spot bitcoin markets are not currently ‘regulated’,” explaining in a footnote why monitoring sharing arrangements for the bitcoin futures market would not work for spot ETFs.
Meanwhile, BlackRock/Nasdaq argues in the filing that there doesn’t need to be a significant, regulated market at all, citing previous ETF disapprovals.
“The Significant Size Regulated Market Test does not require the spot bitcoin market to be regulated for the Commission to approve this proposal, and the precedent makes it clear that an underlying market for a spot commodity or spot currency , which is a regulated market, would indeed be a regulated market. “Exception to the norm,” the filing reads. “These largely unregulated foreign exchange and commodity markets do not offer the same protections as the markets subject to Commission oversight, but the Commission has continually sought oversight arrangements with the underlying futures market to determine whether such products are compatible with it.” The act.”
The bitcoin futures market should suffice for the SEC’s “significant size test,” the filing said.
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