Will 2023 be the year of the Bitcoin ETF?

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The excitement over the hoped-for approval of a cash bitcoin exchange-traded fund is back. This time around, financial giant BlackRocks’ entry into the race for an ETF has raised hopes that the Securities and Exchange Commission will approve the long-awaited product, a decade after the crypto industry first sought to launch a bitcoin ETF.

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In July 2013, Cameron and Tyler Winklevoss called for the launch of the first Bitcoin exchange-traded fund (ETF). Eleven years later, the industry is still waiting for a spot bitcoin product.

A bitcoin ETF, if approved, would allow a wide range of retail investors in the United States to gain exposure to bitcoin as an asset without having to go through the hassle of building a portfolio or managing assets. sometimes temperamental crypto exchanges. Additionally, sophisticated investors like multi-million dollar family offices could invest in a regulated (and therefore safe) bitcoin product. These are some of the reasons advocates want to see an ETF approved by the Securities and Exchange Commission.

Currently, there is still no spot bitcoin ETF trading in the US, but BlackRocks’ filing a few weeks ago signaled to the industry that the time may come when that will change. . Over the past few weeks, we’ve seen half a dozen new applications for a spot bitcoin ETF in the US. Has the market evolved enough to support an ETF, and can companies provide enough assurance to the SEC that an ETF would be safe?

The main difference we are seeing now is that these candidates are spending more time talking about their surveillance sharing agreements (with some SEC incentives). Coinbase will be the marketplace for all major potential ETF issuers who have identified a partner so far, namely Nasdaq and Cboe BZX, on behalf of BlackRock, Fidelity, VanEck and others.

The SEC has discussed surveillance sharing agreements in the past. In 2019, the regulator issued a 112-page order explaining its rejection of a bitcoin ETF application from Bitwise, saying the bitcoin market had too much potential for manipulation and needed a supervisory sharing agreement with a regulated market of significant size in the underlying assets to deter potential manipulation.

One problem is that there is no clear definition of what constitutes a regulated market of significant size, said James Seyffart, an analyst at Bloomberg Intelligence who has tracked bitcoin ETF applications for years.

Usually whenever they delay all the way then they deny them. In that process, they sometimes make comments, Seyffart said. Some of them will be behind closed doors… some of them will definitely happen.

Coinbase is undoubtedly the largest US crypto exchange. According to CoinGecko, it has more than double the overall 24-hour trading volume (when normalized) compared to its nearest competitor, Kraken. Most of that seems to come from its bitcoin market.

The SEC has even acknowledged Coinbases’ role in the US, saying it is one of the largest crypto asset trading platforms in the world and the largest in the US in its lawsuit against the exchange.

The SEC lawsuit against Coinbase has nothing to do with its bitcoin market, which I suspect is also one of the reasons these companies are looking to the exchange as a deal partner monitoring sharing.

The open question is whether the SEC will accept Coinbase operating a regulated bitcoin market of significant size and whether this is required for approval.

Last year, the regulator didn’t seem to think there was a regulated market for bitcoin. Specifically, when it approved the Bitcoin futures ETF Teucriums in April 2022, the SEC wrote that bitcoin spot markets are currently unregulated, in a footnote explaining why security-sharing agreements monitoring for the bitcoin futures market would not work for spot ETFs.

Meanwhile, the BlackRock/Nasdaq filing argues there’s no need to have a large regulated market in the first place, pointing to past ETF rejections.

The significant regulated market test does not require the bitcoin spot market to be regulated for the Commission to approve this proposal, and the precedent makes it clear that an underlying market for a spot commodity or currency being a regulated market would actually be an exception to the norm, according to the filing. These largely unregulated foreign exchange and commodity markets do not offer the same protections as markets subject to Commission oversight, but the Commission has always reviewed arrangements to share oversight with the underlying futures market. to determine whether these products were compatible with the Acts.

The bitcoin futures market should be sufficient for the SEC’s significant size test, according to the filing.

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