What's preventing the launch of a bitcoin-ETF? Why the SEC is approving other exchange-traded funds
How the ETF approval process in the US works and why bitcoin funds in particular are being delayed
The first attempts to launch bitcoin ETFs in the US took place about 10 years ago. We tell you how the ETF registration process is structured, who is involved, and why the process has been delayed for cryptocurrency funds
When news broke that BlackRock had filed an application with the U.S. Securities and Exchange Commission (SEC) to create a bitcoin exchange-traded fund (ETF), the cryptocurrency market took it as a big event. The presence of financial institutions of this caliber opens up the crypto market to those investors in the U.S. who are wary of coming into direct contact with cryptocurrencies.
Various exchange-traded funds (ETFs), including gold, have trillions of dollars in assets under management. The cryptocurrency community believes that even a small percentage of this capital can potentially impact the global crypto market. If spot bitcoin ETFs are approved, demand for the cryptocurrency will increase: buying shares in the funds involves the delivery of bitcoin as an underlying asset, i.e. its direct purchase in the market, affecting the exchange rate.
Under the management of BlackRock alone are assets totaling about $ 9 trillion. According to the assessment of the analytical company Chainalusis, it is North America is the largest cryptocurrency market, an annual turnover of which is about $ 1.2 trillion. This amount exceeds 24% of the global annual volume of transactions in cryptocurrency. According to analysts at JP Morgan, the rise in bitcoin and other cryptocurrencies at the end of October was mostly triggered by institutional demand for crypto-assets.
The excitement around the application for a spot ETF from BlackRock surpassed the level of interest in applications from other management companies, including Fidelity Investments. On October 16, bitcoin jumped above $30,000 on the sudden news that BlackRock's ETF had been approved by regulators, and when it turned out that the news was fake, prices quickly returned to previous levels.
Sentiment around cryptoassets is noticeably shifting toward institutional players. Last week, data from Google Trends showed that the number of searches for the key phrase spot bitcoin etf in international Google searches peaked. The almost 100% success of the approval of dozens of other ETFs from BlackRock adds optimism to supporters of cryptocurrencies: analysts openly call the approval and launch of the first spot bitcoin ETFs a catalyst for the beginning of a new bull cycle in the crypto market. CryptoQuant experts estimate that if issuing companies invest just 1% of their assets in cryptocurrency ETFs, the price of bitcoin could increase to $50-70k.
How new ETFs are being launched in the US
The approval of such ETFs is not an easy process, tied to a number of bureaucratic intricacies. Despite the fact that thousands of ETFs have already been approved by regulators in the U.S., those tied to direct delivery of cryptocurrency are facing numerous rejections and postponements. In a column for Forbes, Sean Stein Smith, a professor at the City University of New York and member of the Wall Street Blockchain Alliance advisory group, explains the registration process for a spot bitcoin ETF using BlackRock as an example.
First, a potential ETF manager, called a sponsor, files a plan to create an ETF with the SEC. The process of launching a bitcoin-ETF has stalled at this stage, as the SEC continually rejects applications from BlackRock and other applicant companies. In their case, the sponsor and the authorized participant (usually a large institutional investor) are likely the same person. Assuming the application is approved, the authorized participant would begin purchasing the underlying asset (i.e., bitcoin), placing it in a trust, and then using those assets to form ETF units.
"It may seem like a complicated process, but there are already about 3,000 different ETFs in the U.S., with assets valued at nearly $10 trillion, which also shows how atypical the persistent rejection of applications to create bitcoin ETFs seems," Smith writes.
What's the problem with bitcoin ETFs
The first attempts to launch a spot bitcoin ETF were made about 10 years ago by Gemini cryptocurrency exchange owners the Winklevoss twin brothers. Any ETFs are approved by the SEC, and the main US exchange regulator has already approved thousands of such products since their inception, so dissatisfaction over the lack of such an ETF for Bitcoin is constantly growing. Despite approving other ETFs with "fairly exotic underlying assets and business models," the SEC, under the leadership of Gary Gensler, has steadfastly refused to approve the creation of a spot bitcoin ETF despite mounting pressure from the industry and lawmakers, Smith notes.
In official comments and statements, the SEC reiterates that because bitcoin is a volatile asset, the crypto industry is rife with fraud and opportunities for market manipulation, the protections against which have yet to be developed, such a market is not mature enough to serve as an underlying asset for an ETF product.
On the other hand, many cryptocurrency supporters believe that the absence of such an ETF is proof of the anti-cryptocurrency stance of some politicians in the U.S. and the same SEC, which has filed several sensational lawsuits against companies operating in this field this year.
Nevertheless, the applications from BlackRock and other companies have already been corrected several times and resubmitted to the SEC for review. According to Bloomberg Intelligence analysts, this indicates a "constructive conversation" with the regulator, which usually only happens when an ETF is on its way to approval. They believe there is an estimated 90% chance that the SEC will approve the ETF in early 2024.
According to JPMorgan experts, a failure to approve a Bitcoin ETF is "unlikely but still possible." But in case of refusal, the SEC may face lawsuits from issuing companies.
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