For the early adopters, the cryptocurrency industry is world’s apart from what it used to be in 2009. As cryptos gain traction among institutional investors, widespread adoption looks increasingly likely.
While decentralized currencies will not replace fiat money anytime soon, the industry has been making strides toward progress lately. The latest ongoing development is the prospect of the world’s first spot Bitcoin ETF becoming a reality.
For over a decade, the Securities and Exchanges Commission (SEC) has shrugged aside every Bitcoin ETF application that tracks the cryptocurrency’s current value. That said, it takes a lot more than a decade of rejection to dissuade an entity as persistent and massive as BlackRock.
On June 15, 2023, BlackRock filed for SEC approval for a proposed spot Bitcoin ETF. The SEC has its share of concerns about approving funds tied to current cryptocurrency prices. BlackRock has proposed measures to track trading, clearing activity, and customer identities. However, it may take more to convince the SEC to approve an iShares Bitcoin ETF.
Regardless, the June 15 filing inspired a flurry of applications from other major asset management firms. Many insiders at Wall Street believe that if there’s one firm that can convince the SEC to approve ETFs tracking current cryptocurrency prices, it is BlackRock.
As the world’s largest asset manager, BlackRock also has iShares under its belt. iShares comprises the biggest ETF family in the US, boasting almost $ trillion in Assets Under Management (AUM).
If approved, BlackRock’s spot Bitcoin ETF can effectively put an end to the “crypto winter” plaguing the industry. Today, we will discuss why there is renewed hope in the crypto industry with BlackRock aiming to succeed where countless others have failed.
What Exactly is a Spot Bitcoin ETF?
Just to be clear, approval for the BlackRock iShares spot Bitcoin ETF will not make it the first exchange-traded fund related to the world’s first cryptocurrency. The SEC has approved several Bitcoin ETFs and those related to other crypto-related assets. That said, the securities watchdog has only given the go-ahead for funds tracking futures or own stock in publicly-traded companies with indirect cryptocurrency exposures.
With a spot Bitcoin ETF, however, BlackRock and other asset managers want to offer easier and more liquid access to funds directly tracking current Bitcoin prices instead of futures contracts.
How does this make spot ETFs different from Bitcoin ETFs already approved? Spot prices are what traders might refer to as current prices for assets instead of prices slated for future delivery. Put simply, a spot ETF is not linked to prices an asset can achieve in the future. Instead, it reflects current value. Any derivative contracts derive value from the spot prices of underlying assets.
BlackRock’s Goal of Addressing the SEC’s Concerns
The SEC has cited several concerns when rejecting applications for spot Bitcoin ETFs in the past. The difference with BlackRock’s application is the firm’s proposal of measures aligning with those concerns. For instance, it aims to eliminate loopholes that ensure an exchange cannot divert customer assets to unauthorized parties. This proposal came in light of FTX crypto exchange’s founder being indicted for several counts of conspiracy to commit money laundering and fraud in 2022.
Sam Bankman-Fried, the exchange’s founder, was allegedly using customer funds as his own. Sam would allegedly move funds from FTX to Alameda Researched, a separate trading firm he owns. He was purported to be using customer assets freely as his own.
Before submitting its application to the SEC, BlackRock studied the lawsuits against major crypto exchanges to ensure it can navigate avoiding similar violations.
What Does BlackRock’s Filing Mean for the Cryptocurrency Industry?
It took less than two weeks of BlackRock’s filing for a spot Bitcoin ETF for others to follow. Fidelity, another giant in global asset management, filed a revised application for its own Bitcoin ETF. Originally proposed in 2021, the SEC rejected Fidelity’s Wise Origin Bitcoin Trust again in 2022. Following BlackRock’s refiling, WisdomTree and Invesco also joined the bandwagon. Like BlackRock, other firms have proposed similar measures to ease the SEC’s concerns.
If approved, listing the first spot Bitcoin ETF can place BlackRock firmly in the driving seat for further innovation. It will also pave the way for more funds tracking current cryptocurrency prices. However, the SEC still has concerns regarding the fund’s potential to make room for market manipulation. BlackRock’s surveillance-sharing agreement can mitigate the risk, prompting other firms to follow suit.
BlackRock Has Company in Creating a Bitcoin ETF Ecosystem
After BlackRock’s filing, EDX Markets has launched an execution only-trading venue for institutional investors, backed by Charles Schwab, Fidelity Digital Assets, and Citadel Group. It also has plans to start a clearing firm later in the year. These measures can help eliminate market manipulation and fraud risks for spot-price exchanges and Bitcoin funds. If BlackRock can offer solutions that the securities watchdog approves, it might be in the running to be the first firm with a spot Bitcoin ETF.
EDX’s new institutional exchange can keep broker-dealer activities separate from each other and the exchange itself. This way, the exchange will not have opportunities to pocket customer assets. The clearing firm it plans to launch will help further by segregating settlements from trading activities. This way, it will create neutral third parties guaranteeing traders that funds to purchase Bitcoin and other assets are actually there.
One Key Detail in BlackRock’s Filing to Remember
As exciting as the prospect of the first spot Bitcoin is, traders must understand one key detail. BlackRock’s application requests permission to run a trust instead of an ETF. While it would arguably become a de facto spot Bitcoin ETF, a trust is different from an ETF.
A quick look at Grayscale Bitcoin Trust (GBTC) can paint a clearer picture. GBTC is a popular trust investing in Bitcoin. Investment trusts typically trade at lower prices than the market value for underlying assets. For GBTC, the discount was an estimated 50% late 2022. BlackRock’s filing has reduced that deficit to around a third.
GBTC lets investors sell their shares in the trust in the market but the underlying Bitcoin held by the trust is not redeemable. With no redemption fee and a 2% expense ratio, GBTC’s discounted valuation makes sense.
Apparently, BlackRock has already been in talks with market makers to create the arbitrage opportunity for a secondary market in the proposed trust’s shares. Theoretically, it can help BlackRock iShares Spot Bitcoin ETF avoid the price discounts and distortions GBTC faces.
As of this writing, BlackRock’s application is under the SEC’s official calendar. Once published in the Federal Register, it will trigger a 21-day public comment period. Once that ends, we can get a clearer picture of when the SEC might announce a decision.