Don’t Expect a Flood of Spot-Bitcoin ETFs Anytime Soon – Experts

Are we going to see a wave of mock bitcoin exchange traded funds (ETF)?

If you’ve been in crypto for a while, you’ll know that ETFs have long been considered the key to building a broad-based market for digital assets. And recent news that BlackRock, no less, has submitted a proposal to set up such a vehicle has raised hopes. If a belligerent, well-connected institution like BlackRock were involved in Bitcoin ETFs, an approval and the first US crypto ETF would surely not be far off.

Well, we may have to wait a while longer, according to a series of experts contacted by CoinDesk.

But others like Opimas LLC CEO and founder Octavio Marenzi said the application was dead on arrival.” They identified a custodian for the assets that the SEC itself said were operating illegally…I don’t quite see how BlackRock is making that happen,” Marenzi said.

It’s been a decade since the crypto industry first tried to launch a spot bitcoin ETF and one person who understands the process intimately doesn’t see any approvals anytime soon.

Volatility Shares’ 2x Bitcoin Strategy ETF (BITX) became the first leveraged crypto ETF to be available in the US on June 27, and at the helm of its carefully filed filing with the SEC was Chief Investment Officer Stuart Barton.

“The delay is due to the unregulated nature of the crypto exchanges,” Barton said. “It takes a long time for an exchange to be regulated. It is a multi-year process. This is a step before we get to an ETF approval. At the moment, there is no exchange on which bitcoin is traded that is regulated.”

CoinDesk also spoke to two other industry experts – hedge fund manager James Koutoulas who is currently fighting the SEC’s motion to subpoena him and a political meme coin targeting Joe Biden and Jai Waterman, CEO of blockchain-based trading platform Blockstation.

They both threw cold water on the idea of ​​an immediate spot bitcoin ETF approval in the US. Based on the experience of his ongoing difficult legal situation with the SEC, Koutoulas said that while the crypto community’s optimism is justified, he is not sure it will be 100% grounded in eventual approval.

“It’s not a foregone conclusion that an ETF will be approved,” Koutoulas said. “You just have to look at the conflicts (for example: lawsuit against Coinbase) for that.” Waterman said the SEC is in a difficult position with political pressure, but it’s still “going to take a long time.”

“The ETFs will not be approved until the Coinbase lawsuit is settled or squashed,” Waterman said. “They can switch and use someone else instead of Coinbase, but that’s also difficult because regulators want an organization with strong credibility and no ongoing lawsuit against them.”

However, BlackRock CEO Larry Fink appears to be convinced. He went from saying that fans of the asset class were using it a lot for “illegal activities” to saying bitcoin could “revolutionize the financial system,” but a recent comment indicated that even he thinks an ETF approval may take time.

“We’re hoping that, as we have in the past, we can work with our regulators and get the filing approved one day, and I have no idea what that one day will be, but we’ll see how it all plays out,” Fink said earlier this month said.

In addition to the approval of the leveraged product, BlackRock’s application and subsequent market optimism, the XRP decision put collective pressure on the SEC, according to experts. Last week, a US court ruled partly in Ripple’s favor, saying that the sale of Ripple’s XRP tokens on exchanges and through algorithms do not constitute investment contracts. “The XRP ruling could support Coinbase’s case,” Waterman said. “This could be another pressure point on top of these ETF applications. However, I think the SEC will appeal Ripple’s decision.”

Koutoulas said the XRP decision dealt a very sharp blow to the SEC because it confirmed everything the crypto-legal community had argued in terms of the SEC’s overreach. “Just hours after their devastating loss in XRP… the SEC rushed into court to harass me with a subpoena, admitting ‘the question of whether or not our political meme coin is a security is for a no other day,” Koutoulas said, citing the SEC’s subpoena.

“It’s clear that this subpoena is not about a legitimate investigation, it’s about weaponizing the federal government against cryptocurrency and political opponents.”

Lawyers for waterman manager Grayscale added more pressure to the SEC when they criticized the regulators for approving Barton’s leveraged bitcoin-based ETF after rejecting Grayscale’s spot bitcoin ETF application. They sent a letter to the US Court of Appeals for the District of Columbia Circuit alleging that the SEC has approved a leveraged ETF “that is even riskier” than Grayscale’s own spot bitcoin ETF. Grayscale is embroiled in a lawsuit with the SEC over the rejection of its own mock bitcoin ETF application. Grayscale is a subsidiary of Digital Currency Group, CoinDesk’s parent company.

Barton said the process for approving a leveraged ETF and a spot bitcoin ETF is just different. “The difference between our leveraged ETF and a spot bitcoin ETF is that our ETF tracks bitcoin futures that trade on a regulated exchange, the Chicago Mercantile Exchange (CME), but the proposed bitcoin spot ETF plans to referring to bitcoin cash that is not traded on any regulated exchange,” Barton explained.

Barton said the methodology in place for approving spot bitcoin ETFs puts the SEC in a very powerful position because of a listing rule — 19b-4. The rule requires self-regulated entities to seek the SEC’s approval before making any changes to trading rules. In this case, asking NASDAQ and the Cboe’s BZX Exchange to take over compliance responsibilities, Coinbase, the chosen oversight partner is an unregulated exchange, does not meet the SEC’s requirements. As part of this rule change, NASDAQ and Cboe BZX want to fulfill some of Coinbase’s compliance obligations through a custody sharing agreement. Coinbase is so far an unregulated exchange, and thus does not currently meet the SEC’s requirements.

“The challenge with an ETF filing that needs a 19b-4 is that the exchange needs a specific approval decision from the SEC to list, and that puts the SEC in a very powerful position,” Barton said. .

“The exchanges not only have to argue that the ETF falls under a certain set of ETF rules, but also have to answer a much broader set of questions from the SEC because they’re really asking ‘can we please change the rules. of our exchange to list this new product as a new ETF’ and very few 19b-4s are filed and can be a very long process.”

All five of Cboe’s ETF filings: Wise Origin, WisdomTree, VanEck, Invesco Galaxy and ARK 21Shares, and BackRock’s iShares Bitcoin Trust filed 19b-4 filings. “The weakness of an application that requires 19b-4 is that you need a specific approval decision to list from the SEC and that puts the SEC in a very powerful position,” Barton said. “They don’t have to argue with you about whether it’s a good investment. They have to sign up further because you’re really asking them ‘can we please change the rules of our exchange to list this new underlying product as a new ETF’ and very few 19b-4s are filed and it’s a very long process. “

Normally, when you go against a regulator, you try to take the easiest route and it’s a very difficult route to market. When asked why BlackRock applied despite the difficult route, Barton said he wanted to be first with the chance that the pressure would come to the SEC.”

The experts polled by CoinDesk overwhelmingly predicted that while it will take time, and perhaps longer than the crypto community thinks, BlackRock is best suited to be placed first in the ETF race.

“If anyone is going to be approved, it will be BlackRock,” Koutoulas said. “(Because of) BlackRock’s track record of having about 500 ETF applications approved and only one permanently rejected, and the US government doing so much business with BlackRock.”

Such an organization can “stand the test of time and they can work on this for years to come. They may have to adapt and adjust, but eventually with the necessary financial resources they will manage,” said Waterman.

While BlackRock may be considered a favorite by many, Barton points out that smaller organizations often have an advantage in being nimble.

CORRECTION (July 18, 05:30 UTC): Correct description of Blockstation in 11th paragraph.