SEC Ready to Unleash Spot Bitcoin ETF, Potentially Reshaping Crypto Landscape

Large money management businesses are growing increasingly hopeful that the Securities and Exchange Commission (SEC) will create crypto history in early January by authorizing the first "spot" bitcoin exchange-traded fund.

According to sources close to these companies, recent SEC advice indicates that a green light will be issued by January 10, 2024. This is the final date for the SEC to accept or refuse an application by Cathie Wood's Ark Investment Management, in collaboration with 21Shares, for a spot bitcoin ETF.

A dozen businesses, including Wall Street asset-management heavyweights like BlackRock and Fidelity, have applied for a spot bitcoin ETF, or one based on the digital asset's real-time pricing.

People at these businesses believe the SEC might accept several applications at the same time. An SEC spokeswoman declined to comment.

If clearance is granted, as many think, it will be a significant step toward the general acceptance of cryptocurrencies in the United States, something that Wall Street's top policeman, SEC Chairman Gary Gensler, has been hesitant to embrace until recently, when the U.S. The Court of Appeals for the District of Columbia. Circuit delivered a decision that limited his jurisdiction to regulate cryptocurrency.

A spot bitcoin ETF would provide individual investors with greater exposure to the world's largest cryptocurrency at a lower cost than the already permitted bitcoin ETF, which is based off the futures market. Furthermore, investors may gain exposure to bitcoin without resorting to an uncontrolled exchange by acquiring an ETF through highly regulated money management businesses while trading takes place on the New York Stock Exchange and Nasdaq stock exchanges.

SEC's Unusual Requirement: Implications for Bitcoin ETF Investors

One disadvantage for investors is that the SEC has made an unusual requirement in the way the ETFs are constituted. In discussions with large money management businesses, the SEC has insisted that applicants buy shares of the ETF with cash rather than the underlying asset, which in this case is bitcoin.

Conventional ETFs permit "in-kind" transactions, which implies market makers might trade bitcoin for ETF shares. The "cash create" option requires ETF issuers to exchange bitcoin for cash on every transaction, which is a slower and more expensive procedure that needs the issuers to acquire the bitcoin rather than the broker-dealers.

Another downside of cash generation, according to securities attorneys, is that investors would lose a significant tax benefit; "in kind" transactions are not taxed, but selling Bitcoin for cash before purchasing an ETF is.

Several prominent bitcoin ETF applicants, like Grayscale, are unwilling to abandon the battle for in-kind creations. Grayscale told the SEC in a hearing on Tuesday that giving both in-kind and cash creations and redemptions is in the best interests of investors because it promotes "a deeper, more robust primary market, resulting in a more efficient ETP market structure."

"Cash creation essentially shifts the burden of trading bitcoin from professional trading firms to authorized participants (APs) such as Morgan Stanley and Goldman Sachs," said Dave Weisberger, CoinRoutes co-CEO. "This means there will be less competition between issuers and performance will be based on which issuer has the better resources and trading strategy."

According to Weisberger, the SEC prefers cash redemption over in-kind since the agency does not presently allow broker-dealers like Robinhood and Fidelity to trade spot bitcoin directly.

It is unclear why the SEC continues to prohibit brokers from trading spot bitcoin, but Weisberger believes it has a lot to do with members of Congress' political aversion to digital assets. According to those who have spoken with the SEC, the agency is concerned about the use of Bitcoin for money laundering, market manipulation, and other unlawful objectives.

According to one former SEC official, Gensler's general hatred of digital assets is the reason he's attempting to "drag" the new crypto product. Gensler has yet to offer complete clarification on Bitcoin's true status, whether it is a lightly regulated commodity or an asset like a stock or bond that requires the full regulatory attention of the commission.

The same can be said for Ethereum, the second-most popular cryptocurrency. In the past, Gensler has stated that most other digital coins are securities, but as SEC head, he has kept silent on the subject.

With $9 trillion in assets under management, the world's largest money manager, BlackRock, has made obtaining SEC clearance for its planned bitcoin ETF a top business goal, according to FOX Business. Larry Fink, the founder and CEO of BlackRock, has described Bitcoin as "an international asset" and a "store of value" that rivals gold's long-held standing.

Bitcoin, which began the year at $16,000, has subsequently risen to almost $40,000, a 65% increase in the last three months.

The decision is seen as a major precedent on which money managers seeking the spot bitcoin ETF would rely if their applications are denied by the SEC.