Exploring the SEC's Procedure for Approving (or Denying) a Bitcoin ETF
- By Cristopher Reeve
- Posted on Oct. 22, 2023
- Likes: 92
Unlocking the Potential of Bitcoin Spot ETFs: A Comprehensive Exploration
The impending arrival of a Bitcoin spot ETF has garnered significant attention from both individual and institutional investors. But what exactly is the process involved in bringing such an ETF to the market?
When the news broke that Blackrock had submitted an application for the creation of a spot Bitcoin ETF to the SEC, the crypto market celebrated this development as a universally positive step. While some may express concerns about traditional financial institutions entering the crypto space, it's important to recognize that these are precisely the types of entities necessary for crypto to attain widespread acceptance.
The excitement surrounding this specific spot ETF application has surpassed the expectations set by numerous similar submissions in recent times. On October 16th, when it was mistakenly reported that the Blackrock ETF had received approval, the price of Bitcoin briefly surged beyond $30,000. However, once the misinformation was corrected, prices swiftly retreated to their previous levels. This highlights a notable shift in sentiment, with institutional players gaining prominence in the crypto asset arena. Blackrock's nearly 100% success rate with past ETFs further fuels optimism in the market.
Now, let's delve into the intricate details of the ETF approval process, understand the key differentiators in Bitcoin spot ETFs, and unravel the mystery of why a spot Bitcoin ETF has remained elusive in U.S. markets.
Demystifying the Process of Submitting ETFs
The journey of submitting ETFs may appear intricate, especially in light of the numerous setbacks and delays faced by Bitcoin ETFs. However, it's a process that has seen success many times before. Here's an overview of how it works:
In the initial step, the prospective ETF manager, known as the sponsor, submits a plan to the SEC to create an ETF. This is where the Bitcoin ETF process often hits a roadblock, as the SEC frequently declines these proposals. In recent applications, such as the one from Blackrock, the sponsor and authorized participant, typically a large institutional investor, are often the same entity. If the application progresses beyond this point, the authorized participant begins acquiring the underlying assets, placing them in a trust, and subsequently using these assets to create ETF units.
While it might sound complex, it's worth noting that there are nearly 3,000 ETFs in the United States, holding assets valued at nearly $10 trillion. This illustrates the unusual nature of the consistent rejections of Bitcoin ETF applications.
Key Differentiators in Bitcoin Spot ETFs
In comparison to trust offerings, such as the Grayscale Bitcoin Trust, there are several fundamental distinctions that set them apart from spot ETFs. Firstly, trust products are typically not redeemable for the underlying asset, which explains why the price of the underlying asset, Bitcoin, can significantly differ from that of the trust product.
In contrast, spot ETFs function as open-end fund systems with the flexibility to issue new shares, allowing them to better align with Bitcoin's spot price movements. Additionally, spot ETFs often offer improved liquidity and tax advantages for investors, making them an attractive option for a broad range of investors.
Understanding the Approval of ETFs
The approval of ETFs falls under the jurisdiction of the SEC, which has granted its endorsement to thousands of such investment products since their inception. This is precisely why the absence of a Bitcoin spot ETF has been a growing source of frustration. While other ETFs with relatively exotic underlying assets and business models have gained approval, the SEC, under the leadership of Gary Gensler, has remained unwavering in its reluctance to greenlight the creation of a Bitcoin spot ETF, despite mounting pressure from industry stakeholders and lawmakers.
The Enigma of the Missing Bitcoin ETF
The question of why a spot Bitcoin ETF is absent from U.S. markets elicits diverse responses depending on whom you inquire. Officially, the SEC has consistently underscored concerns related to the extreme volatility of Bitcoin, the prevalence of fraud and misuse within the crypto industry, and the absence of adequate investor protections. From this perspective, the market is considered immature for serving as the underlying asset of an ETF product.
On the other side of the spectrum, numerous crypto advocates contend that the absence of a spot ETF is indicative of the anti-crypto and anti-Bitcoin stance that some U.S. policymakers appear to embrace. It's worth noting that the SEC, while initiating a slew of enforcement actions and lawsuits against firms operating in the crypto space, has displayed reluctance in permitting new crypto or Bitcoin products to enter the marketplace.
As the prospects for a Bitcoin spot ETF continue to surge, arguably higher than ever before, it's crucial for investors and entrepreneurs to grasp the inner workings of the ETF approval process, the key players involved, and the underlying reasons for the protracted wait.