Cryptofinance: BlackRock takes on SEC in bitcoin ETF battle

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Hello and welcome to the latest edition of the FT Cryptofinance newsletter. Scott’s away this week so you’ve got me, and I’m taking a look at the recent flurry of spot bitcoin ETF applications.

Who would have thought the dry business of filing for an exchange traded fund with the US securities regulator could elicit so much excitement?

The crypto industry has been set alight by some of the US’s biggest money managers filing applications in America to create and run spot bitcoin ETFs.

The world’s largest asset manager, BlackRock, led the way, and was followed quickly by Fidelity, WisdomTree, VanEck and Invesco, among others.

Having a spot crypto ETF listed in the US, the world’s largest investment market and teeming with other ETFs, has become something akin to the industry’s Holy Grail. The argument goes that trading bitcoin can be expensive and there are issues such as having to store it as well as its uncertain regulatory status.

A spot bitcoin ETF will bring the coin in line with mainstream assets and enable asset managers to back crypto in a cheap and regulated way, rather than directly buying bitcoin from unregulated crypto exchanges — many of which have found themselves in the crosshairs of the Securities and Exchange Commission.

As BlackRock’s chief executive Larry Fink put it on Fox Business on Wednesday: “It costs a lot of money right now to transact bitcoin and it costs a lot of money to get out of that.” He added that he hoped “regulators look at these filings as a way to democratise crypto”.

The problem is that there have been dozens of applications in the past decade and the SEC has rejected all of them.

But BlackRock’s involvement shows how the pressure to approve is growing and how respectable bitcoin has grown. Back in 2017 Fink spoke for many on Wall Street when he called bitcoin “an index of money laundering”. Now it is an opportunity, to be co-opted.

The SEC has routinely knocked back applications on the grounds that they cannot offer investors much protection that the underlying market in bitcoin isn’t rife with fraud or manipulation. The door has been opened because the agency has indicated that it might bless an ETF if the regulated exchange hosting the listing — either Nasdaq or CBOE Global Markets in the recent filings — had a surveillance deal with a crypto exchange of size to double-check the crypto market for manipulation.

What’s particularly interesting about the applications by BlackRock and others is that (after prompting) they all named Coinbase as their preferred exchange as the custodian for their crypto. To satisfy the SEC’s concerns Coinbase has surveillance-sharing agreements with CBOE and Nasdaq.

The agreements with major Wall Street names are a big endorsement of Coinbase — its shares climbed 11 per cent this week. But, of course, Coinbase is being sued by the SEC for unlawfully operating an unregistered exchange. The SEC’s suit is running parallel with Coinbase’s hopes that it will be allowed to play a crucial role in the supervision of these bitcoin ETFs. Can the SEC simultaneously hold these two positions?

At first glance, the answer is no. A lawyer who has worked on previous (rejected) bitcoin ETF applications told me he was “surprised” by Coinbase’s myriad inclusions. “The SEC in all of its denials has referred to a regulated market, and it’s been pretty clear that it doesn’t view Coinbase as a regulated market company,” he said.

But that might be premature. Fink’s comments shift the calculation. He is not a man accustomed to losing publicly. Coinbase’s collision with the SEC is “a pretty significant overhang”, said Mark Palmer, analyst at Berenberg. It’s “something that you’d have to think would be taken into account in conjunction with the various applications that have been submitted”, he added.

If there is a pathway, it might be that Coinbase is being sued “only” for violating securities laws registrations. Rival Binance was also charged by the SEC for misrepresentations of controls to prevent manipulative trading.

Palmer said that if Coinbase’s involvement proves too big a hurdle for the regulator, it’s likely that BlackRock and others “would simply replace Coinbase with another surveillance provider in the future or another custodian so that their applications would be more acceptable”.

Even so, there’s a lot riding on the SEC’s decision, which must come by mid-August.

After all, BlackRock’s application points out that Coinbase has accounted for about 56 per cent of dollar to bitcoin trading in the US market this year. There is nobody bigger to take on the role as SEC-trusted custodian and exchange for a spot bitcoin ETF — yet. If it’s not to be Coinbase, then who?

What’s your view on how traditional financial institutions are thinking about crypto? Email me at [email protected]

Visit the FT’s Digital Assets Dashboard for analysis of the Wilshire Digital Asset Index, including for round-the-clock updates on the prices, circulating value and other key market metrics of widely traded coins, including bitcoin and ether.

Weekly highlights:

• Billionaire twins Tyler and Cameron Winklevoss, owners of crypto exchange Gemini, are embroiled in a long-running billion-dollar feud with Digital Currency Group over the collapse of its crypto lender Genesis. They accused DCG this week of “fraudulent behaviour” and publicly gave its chief executive Barry Silbert a deadline of later today to pay them back, or risk being sued. Read the back-story here.

• FTX’s top lawyer was supposed to be in charge of cleaning up the exchange’s legal issues and keeping it on the right side of the law. Now Daniel Friedberg is in his own legal tangle, accused by the exchange’s new managers in court of helping create a “wide-ranging con game”. Bloomberg reports on the key legal man.

• Some senior executives are leaving Binance. One of them is Patrick Hillmann, chief strategy officer, who said it was “simply time to move onto the next challenge”.

• The failure of crypto trading group Globix has drawn in members of Gibraltar’s political and legal elite. Read the story by my colleague Scott Chipolina here.

Soundbite of the week: Larry Fink’s conversion

When a billionaire such as Larry Fink — arguably the King of Wall Street — speaks in favour of the democratisation of a “skirt the system” asset that crypto once was, you know something has shifted. Here’s his thinking now.

“We do believe that if we can create more tokenisation of assets and securities, and that’s what bitcoin is, it could revolutionise again finance. And so we look at this as an opportunity to move one step further in terms of providing investors fractions of shares . . . democratising the cost of investing.”

Data mining: Crypto’s tumbling volumes

The price of bitcoin rose above $31,000 this week to its highest point since June last year, just before the crisis of confidence that shook the market and engulfed companies such as Three Arrows Capital and Voyager Capital. But there’s little meat behind the move. Crypto volumes dropped to the lowest level since 2020 in the last quarter, according to data from Kaiko.

Cryptofinance is edited by Philip Stafford. Please send any thoughts and feedback to [email protected].