The race to launch the first spot Bitcoin exchange-traded fund (ETF) in the US is heating up, as two of the world’s largest asset managers, Blackrock and Fidelity, have recently filed applications with the Securities and Exchange Commission (SEC) to offer such products. However, the regulator has been reluctant to approve any spot ETFs so far, citing concerns over market manipulation, custody, and investor protection. Will Blackrock and Fidelity be able to overcome these hurdles and win the fight with the SEC?
Spot ETF is a type of fund that tracks the price of an underlying asset, such as Bitcoin, and allows investors to buy and sell shares of the fund on a regulated exchange. Unlike futures-based ETFs, which use contracts that expire and settle at a future date, spot ETFs hold the actual asset in custody and reflect its current market value. Spot ETFs are seen as more attractive by some investors, as they avoid the complexities and costs of rolling over futures contracts and offer more direct exposure to the asset.
Blackrock and Fidelity are not the only contenders in the spot ETF race. Several other firms, such as VanEck, WisdomTree, Valkyrie, and NYDIG, have also filed applications with the SEC. However, a spot Bitcoin ETF also poses significant challenges for the SEC, which has to ensure that the fund meets the standards of the Investment Company Act of 1940, which regulates mutual funds and ETFs. The SEC has to be satisfied that the fund has adequate liquidity, diversification, valuation, and custody of its assets, as well as that it can prevent fraud and manipulation in the Bitcoin market.
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The SEC has repeatedly rejected or delayed applications for spot Bitcoin ETFs in the past, most notably from the Winklevoss twins in 2018 and 2019. The regulator has also expressed skepticism about the maturity and integrity of the Bitcoin market, stating that it lacks sufficient surveillance and oversight from regulators and self-regulatory organizations.
However, some analysts believe that the tide may be turning in favor of spot Bitcoin ETFs, as the SEC has recently approved several futures-based Bitcoin ETFs, which track the price of Bitcoin through contracts traded on regulated exchanges. These ETFs have attracted billions of dollars in inflows since their launch in October 2021, signaling strong demand from investors for exposure to Bitcoin.
Bitcoin spot ETFs are seen as a more attractive option for investors who want to gain exposure to the cryptocurrency without having to deal with the complexities and risks of buying, storing and securing it themselves. Unlike futures ETFs, which track the price of Bitcoin contracts that expire at a certain date, spot ETFs would track the price of Bitcoin itself, and would hold the underlying asset in custody. This would eliminate the need for investors to pay premiums or fees associated with futures contracts and would also reduce the tracking error between the ETF and the Bitcoin price.
However, Bitcoin spot ETFs also face significant regulatory hurdles, as the SEC has repeatedly expressed concerns about the lack of transparency, liquidity and oversight in the Bitcoin market. The SEC has rejected several applications for Bitcoin spot ETFs in the past, citing issues such as market manipulation, fraud and investor protection. The SEC has also stated that it would require a surveillance-sharing agreement between the Bitcoin exchanges and the ETF providers.
The SEC has also stated that it would require a surveillance-sharing agreement between the Bitcoin exchanges and the ETF providers, which is not easy to achieve given the decentralized and anonymous nature of the cryptocurrency market. This agreement would ensure that the ETF providers have access to information about the trading activity and price movements of Bitcoin on various platforms, and that they can detect and prevent any fraudulent or manipulative behavior that could affect the ETF’s value.
Why does the SEC want a Surveillance-Sharing Agreement
The SEC’s main concern is to protect investors from potential risks associated with investing in Bitcoin ETFs, such as market manipulation, insider trading, or cyberattacks. The SEC believes that a surveillance-sharing agreement would help to monitor and enforce compliance with the federal securities laws and regulations, and to ensure fair and orderly markets.
According to the SEC, a surveillance-sharing agreement would enable the ETF providers to:
Identify and report any suspicious or illegal trading activity on the Bitcoin exchanges, such as wash trading, spoofing, or front-running.
Verify the accuracy and reliability of the Bitcoin price data used to calculate the NAV (net asset value) of the ETF.
Coordinate with other regulators and law enforcement agencies to investigate and prosecute any violations of securities laws or market rules.
Respond quickly and effectively to any market disruptions or emergencies that could affect the ETF’s operations or liquidity.
One of the main challenges of establishing a surveillance-sharing agreement is that it would require a high level of cooperation and coordination among multiple parties, including the Bitcoin exchanges, the ETF providers, the SEC, and other regulators. This is not easy to achieve given the decentralized and anonymous nature of the cryptocurrency market, which operates across different jurisdictions and legal frameworks.
Some of the Bitcoin exchanges may be reluctant or unable to share their data with the ETF providers or the SEC, due to privacy, security, or technical reasons. Some of them may not have adequate systems or procedures in place to collect, store, and transmit their data in a timely and accurate manner. Some of them may not be subject to any regulatory oversight or accountability, which could raise questions about their legitimacy and trustworthiness.
On the other hand, a surveillance-sharing agreement could also bring some benefits for both the Bitcoin exchanges and the ETF providers. For example:
It could enhance the transparency and credibility of the Bitcoin market, which could attract more investors and liquidity.
It could reduce the volatility and divergence of Bitcoin prices across different platforms, which could improve price discovery and efficiency.
It could foster a more collaborative and constructive relationship among the market participants, which could facilitate innovation and growth.
The SEC’s requirement for a surveillance-sharing agreement is one of the major hurdles that has prevented any Bitcoin ETF from being approved in the US so far. However, it is not impossible to overcome. In fact, some progress has been made in recent years.
For instance, some of the Bitcoin exchanges have joined forces to form self-regulatory organizations (SROs), such as Crypto Rating Council (CRC) or Virtual Commodity Association (VCA), which aim to establish common standards and best practices for data sharing, compliance, security, and governance. Some of them have also partnered with third-party data providers or analytics firms, such as CryptoCompare or Chainalysis, which can offer independent verification and validation of their data.