The Ongoing Bitcoin ETF Approval Journey: SEC Decision Anticipated Early in 2024

Major financial entities are increasingly hopeful about the SEC's potential endorsement of the first 'spot' Bitcoin exchange-traded fund (ETF). in early January This could be a transformative moment in the history of cryptocurrency.

Recent communications from SEC officials indicate that a decision might be reached by January 10, 2024, which is the deadline for the SEC to respond to the application submitted by Ark Investment Management, led by Cathie Wood, in collaboration with 21Shares for a spot Bitcoin ETF.

At this time, around thirteen companies have sought approval for a spot Bitcoin ETF, with their value linked to the current price of Bitcoin. Many believe the SEC might approve several applications in tandem.

Securing this approval could signify a major breakthrough for cryptocurrency acceptance in mainstream American finance. Until recently, SEC Chairman Gary Gensler had expressed reservations about this development, particularly following a ruling by the US Court of Appeals for the DC Circuit that limited his regulatory power over cryptocurrency.

The Importance of a Bitcoin Spot ETF for Retail Investors 

A Bitcoin spot ETF would provide retail investors with better accessibility to the leading cryptocurrency, and at a lower cost compared to an existing Bitcoin ETF that is based on future contracts. 

By opting for an ETF, investors can gain exposure to Bitcoin without engaging with unregulated exchanges, as these transactions would be handled by reputable financial management firms on established platforms like the New York Stock Exchange and Nasdaq.

Nonetheless, there are challenges for investors stemming from a unique requirement by the SEC regarding the ETF structure. The SEC mandates that applicants utilize cash for acquiring ETF shares instead of employing the actual asset, which is Bitcoin in this scenario.

In-Kind and Cash Create Dilemma 

Standard ETFs traditionally allow 'in-kind' transactions, wherein market makers can swap Bitcoin directly for ETF shares. On the other hand, the 'cash creation' methodology requires ETF issuers turning Bitcoin into cash for each individual transaction, which adds complexity as it means that issuers must first purchase the Bitcoin themselves, rather than delegates like broker-dealers. 

Additionally, the cash creation method may lead to a potential loss of significant tax benefits for investors. While 'in-kind' transactions are typically non-taxable, selling Bitcoin for cash prior to acquiring ETF shares would attract taxation implications.

Despite this, several applicants for Bitcoin spot ETFs, like Grayscale, are reluctant to relinquish their fight for the option of in-kind creations. 

The cash creation process effectively shifts the onus of Bitcoin trading from professional trading houses to authorized participants (APs), such as Morgan Stanley and others. Goldman Sachs This shift suggests a reduction in competition among issuers, with performance hinging on which participant has superior resources and strategic insight.

Nonetheless, the SEC is insisting on cash redemptions over in-kind methods, primarily due to the current prohibition against broker-dealers like Robinhood and Fidelity directly facilitating spot Bitcoin trading.

Considerations Behind Potential Delays for Bitcoin ETF Spot Approvals

The SEC has underscored concerns regarding the possible use of Bitcoin in money laundering, market manipulation, and various other illegal activities.

Furthermore, SEC Chairman Gary Gensler has yet to clarify the precise regulatory status of Bitcoin, leading to confusion about whether it's a lightly regulated commodity or a security, akin to stocks or bonds, which would require extensive regulatory oversight from the commission. This ambiguity also affects the classification of Ethereum .

One of the largest asset management firms, BlackRock, is pursuing SEC endorsement for its proposed Bitcoin ETF as a top corporate priority, likening Bitcoin to an 'international asset' akin to gold and a reliable 'store of value.'  prioritized With a portfolio featuring over 400 traditional ETFs, BlackRock's multiple discussions with the SEC signify a strong commitment to introducing these ETFs to the market in the coming year.

While it's within the realm of possibility for the SEC to turn down all applications, those within the industry consider this a less likely scenario. Earlier this year, the DC Court of Appeals reversed the SEC’s rejection of a request by a cryptocurrency asset manager

to transform its GBTC Trust into a spot Bitcoin ETF, with a three-judge panel condemning the SEC’s actions as 'arbitrary and capricious.' Grayscale’s application This ruling sets a vital precedent that other asset managers seeking spot Bitcoin ETF approvals may rely on should the SEC decide to deny their submissions.

Securities and Exchange Commission