Original | Foresight News
Written by Sherry, Researcher at Future3 Campus
Since the end of October and November, the overall market sentiment of cryptocurrencies has improved significantly, which is largely affected by the macro-economy and policies, the most important of which is the approval progress of the BTC spot ETF. When the news of the approval of BlackRock's BTC ETF appeared in the market on October 16, the price of BTC soared by 10%. Although the price fell back after it was confirmed to be false news, in the following two weeks, people's attention to BTC and the overall market sentiment were relatively optimistic, and the price was also rising overall.
In fact, large financial institutions have been applying for BTC ETFs since 2016. Up to now, many regions around the world, such as Canada, have approved BTC ETFs, but the US SEC is still very cautious about it and has not yet given a notice of approval.
Despite this, people still have high hopes for it, especially in the current situation where the market lacks hot spots, the actions of BTC ETF have undoubtedly brought great market attention.
This article will discuss the following contents:
Why should we pay attention to BTC ETF? What impact will it have on the market?
Current BTC ETF application progress
What is different about this BTC ETF application?
What is the probability of this BTC ETF being approved?
1. First of all, why are we paying so much attention to ETFs? What impact will it have on the market?
There is no doubt that as a formal exchange-traded fund, ETF can lower the threshold for ordinary investors to invest in BTC, bring more capital into the market, and bring a large amount of incremental funds to the digital currency market.
Although there are many similar BTC investment products on the market, such as Grayscale's GBTC, which has reached an asset size of 621,300 BTC (US$22.3 billion), ETFs still have incomparable advantages:
1) More direct and liquid Bitcoin investment exposure: Whether it is a trust product like GBTC, or a BTC futures product that has been approved for listing, or a cryptocurrency-related stock ETF, none of them is a direct Bitcoin spot investment product. They have obvious price differences, lack of transparency, and greater financial risks. For example, the highest premium of GBTC can exceed 100%, and the lowest negative premium exceeds -50%, which causes users to suffer a great loss in the purchase process;
2) Lower fees and entry barriers: Directly purchasing ETFs is in line with the usage habits of traditional traders. Compared with directly purchasing BTC on exchanges such as Coinbase, or purchasing trust and hedge fund products, ETFs are safer, have lower fees, and do not require additional learning costs, such as understanding the use of wallets, making it easier for ordinary users and traditional financial institutions to enter.
Because everyone sees the advantages of ETFs, the approval of BTC ETF is crucial for attracting large-scale capital into the entire digital market.
According to Galaxy's report, by estimating the current scale of asset management in the United States, it is expected that after the launch of the BTC ETF, the capital inflow will reach 14 billion US dollars in the first year, increase to 26.5 billion US dollars in the second year, and increase to 38.6 billion US dollars in the third year. At the same time, by comparing with the price changes of gold, it is expected that BTC will rise by 74% in the first year of the launch of the ETF.
Data source: Galaxy.com
Therefore, if the BTC ETF can be approved, it will be a great improvement in the fundamentals of BTC. It will have a long-term impact on the growth of BTC prices. At the same time, other countries and regions such as Hong Kong and other crypto asset categories will also find it easier to obtain ETF approval.
2. What is the current progress of BTC ETF approval?
Currently, there are 11 large financial institutions and asset management companies (including Grayscale) in the United States that are applying for BTC spot ETFs, a record high. At the same time, more and larger institutions are joining in, such as BlackRock, the world's largest asset management company.
In fact, the application for BTC spot ETF started in 2016. After the BTC futures ETF was approved in October 2021, everyone was optimistic about the policy, and a batch of institutional applications appeared, but they were ultimately rejected; around 2022, a new batch of applications began, and they were all rejected.
The SEC’s reasons for rejecting the application can be summarized as follows: the SEC believes that the BTC trading market is vulnerable to fraud and manipulation, lacks appropriate monitoring and investor protection measures, and therefore violates Section 6(b)(5) of the Exchange Act. The applicants’ proof and mechanism of BTC’s anti-manipulation have not been recognized by the SEC.
Since 2023, a new batch of ETF applications have begun, led by AKR 21Shares.
In terms of process, the SEC's ETF approval process is divided into the following steps:
A. Submitting a prospectus: The issuer prepares a prospectus and files a registration statement (Form S-1 or Form N-1A). The SEC reviews the submitted registration statement to ensure that it complies with all applicable laws and regulations and that the disclosures are adequate.
B. The exchange submits a proposed rule change: At the same time or later as the issuer submits the prospectus, the exchange will submit a proposed rule change (Form 19b-4) to the SEC requesting approval for the ETF to be listed and traded on the exchange.
C. Public Comment Period: The SEC publishes the proposed rule change in the Federal Register for public comment. This period is usually 21 days.
D. SEC Approval Opinion: After the public comment period, the SEC will review the proposed rule change, consider the public’s comments, and decide whether to approve it. Typically, the SEC is required to respond within 45 days or announce an extension of up to 90 days. The SEC’s approval opinions include: 1) approval; 2) rejection; 3) filing a lawsuit to determine whether to reject the proposed rule change. Typically, the SEC will adopt 3) filing a lawsuit to determine whether to reject the proposed rule change to further extend the time limit.
E. Final Approval or Default: The SEC has a maximum approval period of 240 days from the date the SEC publishes the proposed rule change in the Federal Register.
The SEC explicitly approves or rejects proposed rule changes.
If the SEC does not respond definitively within the allotted time, the proposal could automatically take effect under federal law, a process known as “default.”
F. Listing: Once the SEC approves the exchange's proposed rule change, the ETF can be listed on the exchange.
As you can see, all ETF proposals are still in the process of approval, and the approval results of a batch of ETFs were postponed on October 4. The earliest deadline is AKR 21Shares, which is expected to have a result on January 10, 2024 at the latest. The next batch of ETFs will have approval results in March. Overall, the SEC has used the tactic of procrastination again this time, and it is estimated that it will have to wait until the deadline.
3. What is different about this BTC ETF application?
We can see that this is not the first time that BTC’s ETF has been applied for, but the market sentiment and comments this time are obviously more optimistic. Through the collation and analysis of various information, this article summarizes the main advantages of the current batch of BTC ETF applications:
(1) Grayscale wins lawsuit against SEC
Grayscale has been applying to convert its GBTC into a BTC ETF, but has been rejected by the SEC in the past. After the ETF proposal was rejected in July 2022, Grayscale filed a lawsuit with the United States Federal Court of Appeals (U.S. Intermediate Court), arguing that the SEC was capricious in approving ETFs and using different standards for approving BTC futures ETFs and spot ETFs.
The lawsuit came to a conclusion in August this year, with Grayscale winning the case, and the SEC ultimately (in October) did not choose to appeal to the US Supreme Court again. This means that under the court's ruling, the SEC can no longer implement its previous different treatment of futures ETF products and spot ETFs, and many of the previous reasons for rejecting spot ETFs are no longer valid.
This has a huge driving force on the application of BTC spot ETF, and can be said to be the main reason for everyone's current optimism. Although it does not mean that the ETF will be approved immediately, it can lay a great foundation for subsequent applications.
(2) BlackRock’s participation
BlackRock is the world's largest asset management company with an AUM of more than US$9 trillion. It has extensive experience in applying for ETFs, and has approved more than 500 ETFs, with only one rejected.
Among the institutions that collectively applied for ETFs this time, except for ARK 21Shares and Bitwise, which applied independently in advance, the others submitted applications jointly with BlackRock's iShares. It can be seen that BlackRock played a major leading role in this, and the contents of the proposal documents of many companies are basically the same.
(3) More complete evidence
Grayscale’s victory has laid a good foundation. The proposals of this batch of institutions have made good use of the SEC’s “double standards” and have a strong orientation in arguing the old issue of how to prevent market manipulation, that is, by citing the SEC’s arguments in approving BTC futures ETFs, they are reversely applied to the argument of spot ETFs to prove the rationality of passing spot ETFs. This makes it impossible for the SEC to refute previous remarks, nor to say that the standards for spot and futures are different, so it can only acknowledge the views in the proposal.
For example, BlackRock cited the SEC’s argument when approving futures ETFs to prove that the SEC believes that “CME’s supervision can capture the impact of related spot market transactions on Bitcoin futures pricing”, but when rejecting spot ETFs, the SEC believes that monitoring futures market prices cannot effectively protect the spot market, thus rejecting CME as a suitable exchange to sign a “shared monitoring agreement”, which reflects “double standards”. In the context of Grayscale’s victory, if the SEC cannot explain this “double standard”, it will say that the “shared monitoring agreement” with CME is reasonable and can effectively prevent market manipulation.
(4) Shared monitoring agreement with Coinbase
As mentioned in the previous section, the shared monitoring agreement was also an important reason for the SEC to refuse approval. The shared monitoring agreement allows different regulatory agencies or exchanges to share trading and market monitoring data, which can monitor and prevent market abuse, such as fraud and manipulation, and ensure market transparency and fairness. The agreement requires a large regulated market related to the asset to be signed, that is, (a) those who attempt to manipulate the ETP may also have to trade in that market to manipulate the ETP, so that the monitoring sharing agreement can assist the listing exchange in discovering and preventing improper behavior; (b) ETP transactions are unlikely to have a major impact on prices in that market.
The SEC believes that the applicants have neither been able to prove that a Bitcoin spot ETF does not require a shared monitoring agreement nor that the exchange (CME) they listed as having signed a shared monitoring agreement can play a role in shared monitoring. In other words, the SEC believes that CME does not meet the requirements of a "large regulated market related to spot Bitcoin."
Judging from the SEC’s approval of futures ETFs, it is impossible for it not to recognize that CME is a "large-scale regulated market". Therefore, the more important reason should be that CME trades BTC futures rather than BTC spot, so it is unable to monitor and protect BTC spot.
In the new round of approval documents, on the one hand, we can see from the previous section that the institutions use the arguments of the SEC when approving futures ETFs to strongly demonstrate the relevance of the BTC futures market and the spot market, and to prove that it is useful to sign a shared regulatory agreement with CME. On the other hand, the exchange that submitted the approval also signed a shared regulatory agreement with Coinbase. As a regulated spot exchange, Coinbase has an average daily trading volume of US$3.2 billion (November 10), of which BTC trading volume exceeds 30%. CME's BTC futures have a recent daily trading volume of about US$1.4 billion, which is in the same order of magnitude. Under the same asset base, futures trading volume is usually multiples of spot trading, so it is difficult to deny that Coinbase is a "large-scale regulated market related to spot Bitcoin."
Although we cannot be sure that the SEC will definitely recognize the shared regulatory agreement with Coinbase, this is undoubtedly a very favorable proof. To this end, ARK 21Shares also resubmitted an amendment and added the content of the agreement they signed with Coinbase.
4. The probability of this BTC ETF being approved
From the above summary, we can see that this BTC ETF approval has great advantages in terms of legal situation and institutional attitude, and the SEC is already in a state that is difficult to refuse.
However, we must also realize that the SEC’s overall attitude towards trading currencies and BTC spot ETFs is not very friendly. We can see this from the recent SEC’s various supervision and lawsuits on cryptocurrencies, as well as its attitude towards approving futures ETFs. In 2021, on the eve of approving the BTC futures ETF, the SEC spoke out to weigh the relevant products. After that, Proshares submitted a prospectus for BTC futures in August, and the ETF was tacitly approved only two months later; those ETFs that did not pass were usually delayed until the last minute.
In addition, the recent false information about the listing of BTC ETF and DTCC listing of BlackRock ETF has caused great market volatility, which is not good news for approval and is likely to bring about concerns about market manipulation.
But in general, based on the good foundation of Grayscale's appeal and the strong arguments of the institutions' proposals, the SEC is now in a state of "riding a tiger and being unable to back down." Unless the SEC finds another way and a new reason to reject it, the probability of approving the ETF is very high.
future
At present, the overall market attitude towards BTC ETF is also very optimistic, especially for investors in the United States. According to CoinShares, as of the week of November 3, global listed digital asset investment products had inflows of US$261 million, which was the sixth consecutive week of capital inflows. During this period, the total assets under management (AUM) of cryptocurrency-related investment products increased by US$767 million, exceeding the inflow of US$736 million in 2022, indicating that institutional interest in cryptocurrencies continues to rise. At the same time, most of the funds inflow from US investors accounted for the majority, and Bitcoin accounted for the largest share of the total inflows, with US$842 million inflows into Bitcoin since the beginning of the year.
In addition, due to optimism about the approval of BTC ETF, since the end of September, more and more institutions have been submitting applications for approval of ETH spot ETF, including Grayscale, VanEck, Invesco, etc.
Due to everyone’s optimism about the approval of the BTC ETF, combined with the narrative of Bitcoin halving in 2024, regardless of whether the ETF is actually passed, we expect the market to be in a relatively positive mood and trend until early January 2024.
