The term “bitcoin ETF” has been trending on social media recently, as speculation mounts about the prospects of a spot bitcoin ETF being approved by the US Securities and Exchange Commission (SEC). There is still much uncertainty around the timing of a potential spot ETF, as well as what type of ETF will be approved, but the entrance of BlackRock into this debate in June sent a strong signal that the SEC cannot continue to ignore investor demand.
What’s a spot bitcoin ETF?
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, like the Hashdex Bitcoin Futures ETF (ticker: DEFI), 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. BlackRock and most other spot bitcoin ETF applicants believe a surveillance-sharing agreement with the exchange where BTC trades solves this, but there has been no evidence that this addresses the SEC’s concerns.
Why does it 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.
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. And, 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. The entry of BlackRock is another sign of the growing recognition of bitcoin’s legitimacy within traditional financial circles.
What regulatory actions are needed?
Usually there are two main documents involved in the filing of a ´33 Act ETF 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 (see below) are the 19b-4 filings that NYSE, CBOE and NASDAQ have filed with their proposed rule changes to list the spot bitcoin ETFs. In other words, the approval of a spot bitcoin ETF is dependent on the approval of the rule change, which is filed in a 19b-4 form.
What’s the timeline?
In the wake of BlackRock’s filing, several other asset managers filed spot ETF applications with the SEC, including Fidelity, Invesco, and WisdomTree. 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 from these managers 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. Various outcomes are possible, ranging from the agency approving multiple applications simultaneously to granting approval to just one firm. The SEC’s decision-making process involves consideration of 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 the most recent group of ETF applications is the first quarter of 2024.
Spot or not, Bitcoin marches on…
As I’ve noted previously, the investment case for bitcoin has continued to strengthen this year. We believe the long-term investment thesis for bitcoin remains intact despite short-term regulatory or market pressures. Regardless of how quickly the SEC acts to allow US investors access to a spot bitcoin ETF, the current environment is presenting a unique opportunity for bitcoin investors, as a combination of secular trends and cyclical forces collide. We continue to believe that bitcoin will help build more diversified and resilient portfolios over time, and remain focused on doing all we can to give investors access to this transformational innovation.
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