Fight to launch spot bitcoin ETF in the US passes another hurdle

The long-running fight to launch a US exchange traded fund investing directly in bitcoin has passed another hurdle after the regulator declined to contest a court ruling made against it.

The US Securities and Exchange Commission had until Friday to appeal against an August federal appeals court ruling that it had been wrong to reject an application from cryptocurrency house Grayscale Investments to convert its $16.7bn Bitcoin Trust (GBTC), the world largest crypto fund, into an ETF.

Judge Neomi Rao, writing for a three-judge panel, said the SEC had been “arbitrary and capricious” in failing to explain why it had rejected applications for “spot” bitcoin ETFs — which invest directly in the digital token — while giving the green light to ETFs trading in bitcoin futures contracts.

Investors reacted to the deadline passing for an SEC appeal by cutting GBTC’s discount to net asset value to about 14 per cent, according to Bloomberg, its narrowest margin since November 2021, having hit a record 48.9 per cent in December 2022. Bitcoin rose 3.7 per cent to $27,757 between Friday and noon UK time on Monday on the news, before spiking above $28,000 on unfounded reports that a rival BlackRock spot bitcoin ETF had been approved, a rumour later denied by both BlackRock and the SEC.

Given that the discount is expected to disappear entirely if the private trust is able to convert into an ETF, it is widely perceived as a barometer of investors’ expectations.

Todd Rosenbluth, head of research at VettaFi, a consultancy said the SEC’s decision not to appeal suggested the future launch of spot bitcoin ETF looked more likely.

“Combined with the regulator’s ongoing interactions with other asset managers seeking to launch a spot bitcoin ETF is a sign that a US spot bitcoin ETF is more likely to come to market in the near future. We could see new products trading in early 2024 after years of the SEC rejecting such plans.”

Grayscale said it “remains operationally ready to convert GBTC to an ETF upon the SEC’s approval”.

The regulator had based its opposition to GBTC’s conversion on a view that bitcoin, which trades on unregulated exchanges, is prone to fraud and market manipulation, whereas bitcoin futures were an acceptable asset for a mainstream retail fund because they traded on regulated venues such as the Chicago Mercantile Exchange.

The SEC’s decision not to appeal against the ruling now leaves it with the option of opposing GBTC’s conversion on alternative grounds or ultimately approving it, which would seemingly open the floodgates to a wave of spot bitcoin ETFs.

Alongside Grayscale, 10 other managers, including BlackRock, the world’s largest money manager, Fidelity, Ark Invest, WisdomTree, VanEck and Valkyrie, have outstanding filings in place to launch spot bitcoin ETFs.

Several of these applicants have amended their filings in recent days to say that their assets would be held in segregated accounts by their custodian and not commingled with either corporate or other customer assets.

The list of risk factors has also been extended in many cases. Ark, for instance, in its joint filing with 21Shares now refers to “the actual or perceived use of bitcoin and other digital assets in illicit transactions, which may adversely affect the bitcoin industry and an investment in the trust”.

It further says that “digital asset mining operations can consume significant amounts of electricity, which may have a negative environmental impact and give rise to public opinion against allowing, or government regulations restricting, the use of electricity for mining operations”.

The fact that many of the applicants have adopted additional wording has given rise to speculation that the SEC is actively engaging with them rather than planning to reject the filings outright, as it has done with every application for the past decade.

Bradley Duke, chief strategist at ETC Group, a provider of crypto exchange traded products, said that while it was possible the SEC might find another reason to oppose spot bitcoin ETFs “it’s becoming increasingly difficult for them to do that”.

“More and more of the largest American financial services firms are opening up some sort of bitcoin or crypto-backed business,” Duke said, mentioning the likes of BlackRock, Fidelity and Charles Schwab.

“There is a feeling of inevitability around crypto and a spot bitcoin ETF in the US,” he added, with Patrick McHenry, chair of the House Financial Services Committee, last month criticising the SEC’s “crusade against the digital assets ecosystem”, which he argued had caused “lasting damage”.

Similar exchange traded products already exist in Canada and Europe, where their advent has so far proved uncontentious.

“We have had the equivalent of spot bitcoin ETFs in Europe for many years and they have traded well and efficiently with no problems,” Duke added.

Rosenbluth believed the SEC would be likely to follow the pattern it set with this month’s rollout of futures-based ETFs investing in ether, the second-largest cryptocurrency, when it created a level playing field by allowing several ETFs to list on the same day, “rather than giving one firm a first-mover advantage,” as it did with the ProShares Bitcoin Trust (BITO), the first US futures-based bitcoin ETF to launch in October 2021.

Ark and the SEC both declined to comment.

The advent of spot bitcoin ETFs in the US would be seen as potentially opening the way for greater mainstream investment in the cryptocurrency industry, given ETFs’ status as a cheap, safe and well-understood regulatory wrapper.

Registered investment advisers, which are typically only permitted to invest in listed, regulated assets, would also have access to spot crypto for client portfolios for the first time.