Large financial firms managing significant funds are increasingly confident that the Securities and Exchange Commission (SEC) is poised to create history in the crypto space come January. Insider information gathered by FOX Business indicates a growing belief among these entities that the SEC will grant approval for the first-ever “spot” bitcoin exchange-traded fund (ETF).
According to sources close to these firms, recent indications from SEC officials suggest a probable approval by January 10, 2024. This deadline marks the final call for the SEC to greenlight or reject the application from the initial firm seeking the SEC’s nod for a spot bitcoin ETF: Cathie Wood’s Ark Investment Management, in collaboration with 21Shares.
Around a dozen companies, including heavyweight Wall Street players such as BlackRock and Fidelity, have filed for a spot bitcoin ETF. This ETF type derives its value directly from the real-time price of the digital asset.
Insiders within these firms speculate that the SEC might approve multiple applications concurrently, although an SEC spokesperson declined to comment on these assertions.
Should the anticipated approval materialize, it stands as a significant stride towards mainstream acceptance of cryptocurrency in the United States. This move marks a shift in stance from SEC Chairman Gary Gensler, who has been cautious about endorsing crypto until recent judicial decisions limited the scope of the SEC’s authority in regulating this domain.
The introduction of a spot bitcoin ETF holds promise for retail investors by providing increased exposure to the world’s largest cryptocurrency at a lower cost compared to the already sanctioned bitcoin ETF linked to the futures market. Furthermore, investors can access bitcoin through a regulated route by purchasing an ETF via reputable money management firms, while trading occurs on established stock markets like the New York Stock Exchange and Nasdaq.
However, a drawback for investors arises from an unusual demand by the SEC regarding the structure of these ETFs. The SEC is pushing for applicants to use cash instead of the underlying asset, i.e., bitcoin, to buy shares of the ETF. This “cash create” approach complicates the process, requiring ETF issuers to exchange bitcoin for cash in every transaction, unlike the conventional “in-kind” transactions allowed by regular ETFs.
This shift to cash creation poses challenges, including the loss of a tax advantage for investors. Unlike “in-kind” purchases that are non-taxable, selling Bitcoin for cash prior to the ETF purchase incurs taxes.
Some applicants, like Grayscale, are hesitant to forgo in-kind creations and have expressed this viewpoint to the SEC, advocating for both in-kind and cash-based transactions to benefit investors.
The SEC’s preference for cash redemption is influenced by its restriction on broker-dealers, such as Robinhood and Fidelity, from directly trading spot bitcoin. This limitation could stem from concerns around illicit use of bitcoin, including money laundering and market manipulation, as conveyed by individuals engaging with the SEC.
Speculation persists about Gensler’s reservations toward digital assets, contributing to the SEC’s cautious approach. Gensler’s stance on bitcoin and other digital currencies remains ambiguous, leaving uncertainties regarding their regulatory categorization.
BlackRock, managing assets worth $9 trillion, has prioritized obtaining SEC approval for its proposed bitcoin ETF. The company’s CEO, Larry Fink, has lauded bitcoin as an international asset and a store of value akin to gold.
The SEC’s recent interactions with BlackRock and several other ETF hopefuls signal the agency’s intensified efforts to bring these ETFs to the market in the upcoming year.
While a denial of all applications remains a possibility, industry insiders view the odds as low. The D.C. Court of Appeals’ ruling in August, which criticized the SEC’s handling of Grayscale’s application, serves as a significant precedent and a potential defense for money managers in case of SEC rejections.
