We do the research, you get the alpha!
In a historic move, the U.S. Securities and Exchange Commission (SEC) has approved a rule change that would allow the first spot Bitcoin exchange-traded funds (ETFs) to begin trading. The approval is a huge milestone in the cryptocurrency industry as it comes after nearly a decade of persistent efforts and numerous rejections from the SEC.
Initially, the rule change document appeared only briefly on the regulator's website before disappearing, leading to further confusion following yesterday's false alarm. However, the document was later added again, putting paranoid crypto minds at ease.
"After careful review, the [SEC] finds that the proposals are consistent with the Exchange Act and rules and regulations thereunder applicable to a national securities exchange," the commission wrote in the approval notice.
In it, the SEC said that the rule changes will allow the NYSE Arca to list the Grayscale Bitcoin Trust, which is being converted to a spot Bitcoin ETF, and newly list the Bitwise Bitcoin ETF and Hashdex Bitcoin ETF; the Nasdaq will list BlackRock's iShares Bitcoin Trust and the Valkyrie Bitcoin Fund; and Cboe's BZX exchange will list ARK 21Shares Bitcoin ETF, the Invesco Galaxy Bitcoin ETF, VanEck Bitcoin Trust, the WisdomTree Bitcoin Fund, Fidelity Wise Origin Bitcoin Fund, and the Franklin Bitcoin ETF.
That means all 11 eligible applicants have now been given the go-ahead to trade on U.S. exchanges.
An exchange-traded fund, or ETF, is an investment vehicle that allows traders to buy shares that are backed by Bitcoin without directly holding the asset themselves. There have been Bitcoin futures ETFs available to U.S. investors for a while now, but the SEC has been resistant to a spot ETF, which would be designed to track the real-time price of Bitcoin.
The notice about the rule change went into detail on some of the reservations that the SEC had about approving a spot Bitcoin ETF in the first place. That includes surveillance-sharing agreements that would give exchanges, fund issuers, and the SEC access to detailed data that will allow them to detect attempts to manipulate markets.
The filing also listed some of the commissioners' lingering concerns, such as the risk of "hacking."
"Some commenters express concern that the Bitcoin blockchain is susceptible to hacking and that the Trusts’ bitcoin could be susceptible to “reverse hacking," the Commission wrote. "Other commenters express concern that a Trust could become 'uncovered' if it issues shares that are not backed by adequate amounts of bitcoin held on behalf of the Trust by its bitcoin custodian. "
The journey toward this landmark approval began in July 2013, when Cameron and Tyler Winklevoss first proposed the Winklevoss Bitcoin Trust. However, the SEC officially rejected their proposal in March 2017, citing concerns over Bitcoin's market volatility and potential investor risks. This set the tone for subsequent rejections of various Bitcoin ETF proposals over the years.
The SEC's stance against a spot Bitcoin ETF seemed rooted in concerns about the cryptocurrency market's structure, including issues like price discovery, trade execution, liquidity, and potential market manipulation. This skepticism was evident in 2018 when the SEC rejected nine applications in a single day, including those from ETF specialists like ProShares.
In 2020, the departure of SEC Chair Jay Clayton and the nomination of Gary Gensler as his replacement in January 2021 brought renewed optimism, given Gensler's deeper perceived understanding of and past comments on cryptocurrencies.
But it’s not been smooth sailing with Gensler at the helm of the securities regulator. As recently as a week ago, during a CNBC interview, the SEC chair was calling crypto the “wild west” and bemoaning a rash of noncompliance among industry players.
Yet, the persistence from various players in the industry, including major financial institutions like BlackRock, Fidelity, and WisdomTree, has continued.
Most recently, potential issuers have proposed using cash-only creation for shares of their Bitcoin ETFs—a move which would limit firms’ exposure to having to handle Bitcoin directly.
Editor's note: This article was updated after publication to include more details regarding the SEC's approval order.
Edited by Guillermo Jimenez.
SHOW ALERT: Tune in to Rug Radio’s FOMO Hour at 10:30am ET Thursday to hear Decrypt’s Stacy Elliott and Fox Business’s Eleanor Terrett chat all things Bitcoin ETF with Farokh Sarmad, Michael Anderson, and Ovie Faruq.