The Bitcoin ETF Approval Dilemma: SEC Decision Expected in Early New Year 2024
In Brief
Major investment firms are optimistic about potential approval of first Bitcoin ETF spot in early January 2024, marking a significant moment in crypto history.
Major investment firms are increasingly optimistic about the Securities and Exchange Commission’s (SEC) potential approval of the first “spot” Bitcoin exchange-traded fund (ETF) in early January, marking a significant moment in crypto history.
In recent guidance, SEC officials suggest that approval is likely to come by January 10, 2024, the final deadline for the SEC to decide on the application from the first firm seeking approval for a spot Bitcoin ETF: Cathie Wood’s Ark Investment Management in partnership with 21Shares.
Currently, approximately thirteen companies have applied for a spot Bitcoin ETF, valued based on the real-time price of the digital asset. These firms anticipate the SEC potentially approving multiple applications simultaneously.
If approval occurs, it would signify a major step toward mainstream cryptocurrency adoption in the US. The SEC Chairman Gary Gensler, has been reluctant about this until recently when the US Court of Appeals for the DC Circuit issued a ruling that restricted his authority in regulating crypto.
Bitcoin ETF Spot’s Essence for Retail Investors
A bitcoin ETF spot would offer retail investors greater exposure to the world’s largest cryptocurrency at less cost compared to an already approved Bitcoin ETF priced off the futures market.
Investors will get the exposure to Bitcoin avoiding an unregulated exchange by purchasing an ETF through highly regulated money management firms while trading occurs on the New York Stock Exchange and Nasdaq stock market.
However, there’s a drawback for investors due to an unusual SEC demand in the way the ETFs are structured. The SEC insists that applicants use cash to buy shares of the ETF, and cannot use the underlying asset, which in this case is Bitcoin.
In-Kind and Cash Create Dilemma
Traditional ETFs allow “in-kind” transactions, enabling market makers to exchange Bitcoin for ETF shares. In contrast, the “cash create” approach necessitates ETF issuers to exchange Bitcoin for cash in each transaction—a more complicated process that requires the issuers themselves to buy the Bitcoin, not the broker-dealers.
Another disadvantage of cash creation is the potential loss of a crucial tax advantage for investors. While “in-kind” purchases remain non-taxable, selling Bitcoin for cash before an ETF purchase would incur taxation.
But several spot Bitcoin ETF applicants, such as Grayscale, are hesitant to give up the fight for in-kind creations.
The process of cash creation essentially transfers the responsibility of trading Bitcoin from professional trading firms to authorized participants (APs) like Morgan Stanley and Goldman Sachs. This shift implies reduced competition among issuers, with performance based on which issuer possesses superior resources and trading strategy.
However, the SEC is insisting on cash redemption over in-kind, primarily because the agency presently prohibits broker-dealers such as Robinhood and Fidelity from directly trading spot Bitcoin.
Potential Reasons For Bitcoin ETF Spot Postponements
The SEC’s commission highlights concerns regarding the potential use of Bitcoin for money laundering, market manipulation, and other illicit purposes.
Moreover, SEC Chairman Gary Gensler has yet to offer complete clarity on the actual status of Bitcoin, leaving questions about whether it is a lightly regulated commodity or a security such as stock or bond, requiring the commission’s comprehensive regulatory oversight. Similar uncertainty surrounds the classification of Ethereum.
One of the biggest money manager, BlackRock prioritized obtaining SEC approval for its proposed bitcoin ETF as a key corporate goal, describing Bitcoin as an “international asset” and a “store of value” comparable to gold.
With over 400 traditional ETFs in its portfolio, BlackRock’s multiple interactions with the SEC, indicate a heightened focus on bringing these ETFs to the market in the new year.
While the SEC could reject all applications, industry insiders consider this outcome unlikely. The DC Court of Appeals vacated the SEC’s denial of crypto asset manager Grayscale’s application to convert its GBTC Trust into a spot Bitcoin ETF earlier this year, with the three-judge panel criticizing the SEC’s actions as “arbitrary and capricious.”
This ruling is seen as a significant precedent that money managers seeking approval for spot bitcoin ETFs may rely on if the SEC rejects their applications.
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Alisa is a reporter for the Metaverse Post. She focuses on investments, AI, metaverse, and everything related to Web3. Alisa has a degree in Business of Art and expertise in Art & Tech. She has developed her passion for journalism through writing for VCs, notable crypto projects, and scientific writing. You can contact her at alisa@mpost.io
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Alisa is a reporter for the Metaverse Post. She focuses on investments, AI, metaverse, and everything related to Web3. Alisa has a degree in Business of Art and expertise in Art & Tech. She has developed her passion for journalism through writing for VCs, notable crypto projects, and scientific writing. You can contact her at alisa@mpost.io
