Notes from the CIO
There is widespread speculation that the US Securities and Exchange Commission (SEC) will approve one or more spot bitcoin ETFs early in the new year, something we write about in detail in our 2024 Outlook.
The SEC has been recently engaging with issuers on their applications and Hashdex has met with SEC staff several times to present our findings regarding mechanisms to allow spot bitcoin to be traded on a regulated market. You can keep up to date with our filing here or learn more about our current ETF here.
While the exact timing of a potential spot ETF approval—as well as the type of ETFs that will be approved—remains unclear, the SEC has clearly accelerated its work on understanding bitcoin ETFs. This is a great development for US investors.
To help provide some clarity around the prospects for a spot bitcoin ETF and why this is such an important milestone for crypto investors, I’m sharing here some background on the process and a few insights into the potential outcome.
Spot bitcoin ETFs
The term “spot” simply means an ETF that tracks the price of BTC itself, as opposed to a derivative of the asset (i.e., bitcoin futures). While futures ETFs can give investors price exposure to BTC in a regulated structure, ultimately ETF investors want access to the price of the asset itself. Spot bitcoin ETFs have been approved outside the US, including in Europe, Canada, and Brazil, but the SEC has continued to reject applications due to concerns that include potential market manipulation.
Why they matter
The approval of a spot bitcoin ETF in the US would be a significant milestone. For financial advisors in particular, a spot ETF would allow them to offer their clients bitcoin exposure in a familiar and trusted vehicle that is liquid and accessible. In our 2024 Outlook we note that spot ETFs will unlock a $50 trillion market across financial advisors, retail investors, and private banks. This will be a massive opportunity that will play out over years.
ETFs are renowned for their efficiency and popularity as vehicles to access various markets and investment themes. They are structured in a manner that can offer superior price efficiencies compared to other investment products. Importantly, a spot bitcoin ETF would symbolize a regulatory endorsement, signifying the market’s maturity and the readiness for institutional investors to enter with confidence. Over the years, significant progress has been made in areas such as bitcoin custody, liquidity, and trading volume. Notably, the successful trading of bitcoin futures on regulated platforms like the CME (Chicago Mercantile Exchange) has contributed to the overall growth and credibility of the crypto asset market.
Necessary regulatory actions
Usually there are two main documents involved in the filing of a ´33 Act ETF (the structure for spot bitcoin ETFs) with the SEC. The first is the Registration Statement, which is the Prospectus for the Fund, and the second is the proposed rule change in a “19b-4” filing. While the ETF issuer is responsible for preparing and filing the Registration Statement for the Fund, it is the responsibility of the exchange where it will be listed to prepare and file the 19b-4.
The reason for this structure is rooted in the regulatory framework and the role of exchanges as self-regulatory organizations (SROs). Exchanges are required to comply with certain rules and regulations set by the SEC when listing securities like ETFs. Form 19b-4 is a part of this regulatory process, and exchanges use it to ask for approval of their rules changes, which includes the addition of a new ETF.
The filings that are currently being tracked by the media that have a maximum 240 day deadline are the 19b-4 filings that NYSE, CBOE, and NASDAQ have filed with their proposed rule changes to list the spot bitcoin ETFs. The approval of a spot bitcoin ETF is dependent on the approval of the rule change, which is filed in a 19b-4 form.
The timeline
We don’t know the type of product that will be the first to offer spot bitcoin, including whether it will be a new ETF or one that is already trading bitcoin futures.
The SEC's approach to selecting which entity can offer a spot bitcoin ETF is complex and unpredictable, involving a decision-making process that considers factors such as market stability, investor protection, and regulatory compliance.
The SEC can delay making a decision on these applications for up to 240 days from when a filing was publicly recorded. There are checkpoints along the way that require some response from the SEC, but they are not required to make a final decision on the application until the 240 day period has passed. The final deadline for one of the applications is January 10, which— combined with the SEC’s meetings and accelerated work to understand all of the filings—is the primary reason for the speculation that some 19b-4 filings will be approved around that date.
New year, new opportunity
Regardless of the timing of the decision on spot ETFs, the current environment is presenting an unprecedented opportunity for bitcoin investors. Early in the new year, the world’s first cryptocurrency will likely experience a demand shock (spot ETF approval) alongside a forthcoming supply shock (the April 2024 halving) and if history rhymes, investors should be rewarded. As we head into 2024, we remain very optimistic regarding the investment case for bitcoin and in our 2024 Outlook we go into detail about this conviction.
As we continue to work with regulators to help give more people access to bitcoin within their portfolios, we are incredibly excited to help facilitate this opportunity for new investors and remain grateful for the trust of our 200,000+ investors.
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