Could The SEC Approve a Bitcoin ETF? If So, What Does That Even Mean?
The potential introduction of a Bitcoin Exchange-Traded Fund (ETF) represents a watershed moment for the digital asset landscape in United States. If the U.S. Securities and Exchange Commission formally approves this type of financial instrument, it has the potential to reshape investing in digital assets, potentially attracting billions in new money pouring into this emerging asset class. This article is neither an endorsement of such an instrument nor a rejection of the concept, but rather an exploration and analysis of the implications should the SEC formally allow such an investment vehicle. Let’s explore the impacts of a Bitcoin ETF.
Why Do Analysts Think This Is Likely?
Digital Assets are extremely speculative and volatile assets from an investment perspective; and the SEC’s role in consumer protection is primarily in the spotlight. In fact, protecting investors from fraud and abuse is one of three primary goals of the SEC’s mission. Digital Assets, cryptocurrency specifically, have certainly been used by some high-profile bad actors in recent years to commit fraud. The second goal is to “maintain fair, orderly, and efficient markets that are worthy of the public’s trust.” This is a harder mandate for the SEC when it comes to digital assets because they are global and markets never close. The SEC is used to regulating entities in the US and the US securities markets. However, trying to “put a stake in the ground” for fairness in a global market is harder than it seems. More on the fairness mandate in a moment. The SEC’s third goal is to “facilitate capital formation that supports economic growth and innovation.” It is these goals around fairness and capital formation that has bumped into the mandate of protecting consumers. In fact, recent court cases and Congressional oversight hearings brought each of these SEC goals to the forefront. The SEC recently suffered a setback when a court ruled that it wasn’t treating digital asset manager Grayscale Trust’s application to convert its Bitcoin Trust into a Bitcoin ETF “fairly” because it had repeatedly rejected the company’s application with little explanation. The SEC hasn’t been able to justify why it has allowed Futures ETFs of both Bitcoin and Ethereum beginning in 2021, but not allowing for retail “Spot” ETFs for Bitcoin and other digital assets. The judge ruled that it needed to treat the Grayscale application fairly. In the wake of that decision and the SECs announcement that it will not appeal that decision (Reuters, 2023) (and other losses by the SEC in court regarding digital assets), there has been a flood of applications by more than 10 investment management firms like Blackrock, Fidelity, WisdomTree and more who have applied to sell and distribute “Spot” Bitcoin ETFs to retail Investors. During two different House Oversight meetings, members of the committees chided the SEC for not upholding its third mandate in promoting “capital formation and innovation” regarding digital assets. Since then, analysts following the application process of these instruments believe that a Bitcoin ETF will likely be approved, however there is no guarantee, timeline, or actual indication by the SEC of this. Analysts also believe the recent spike in the price of Bitcoin, which briefly touched $35,000 USD per BTC, has been driven by the market anticipation of SEC approval as the asset has more than doubled in value in 2023.
What Would A Bitcoin ETF Potentially Mean?
In addition to be volatile and speculative, there are additional complexities for retail investors purchasing digital assets such as transferring the assets and storing the assets themselves; something they do not ever have to do with traditional securities. What would a Digital Asset ETF “look like” and what might it mean for institutions and their clients? With nearly 1:5 Americans owning or trading some form of Digital Asset (CNBC 2022), would a regulated security of this kind of Digital Asset impact anything in the markets? Let’s explore some potential impacts.
Enhanced Legitimacy and Mainstream Acceptance: Historically, the realm of cryptocurrencies, primarily Bitcoin, has been met with skepticism from many professionals in traditional finance. The potential advent of a Bitcoin ETF would offer a layer of legitimacy, presenting Bitcoin not as a speculative fringe asset but as a mainstay within the broader financial ecosystem. By wrapping Bitcoin into a format familiar to traditional investors—an ETF—a bridge would be created between traditional investment and investing in digital assets.
Improved Accessibility for Retail Investors: Previously, investing directly in Bitcoin necessitated a degree of technical sophistication. One needed to understand the concepts of digital wallets, blockchain addresses, and the nuances of navigating and possibly transferring assets to/from cryptocurrency exchanges. With a Bitcoin spot ETF, buying shares would be as simple as purchasing any other stock or ETF through a brokerage account. This simplification could drive a more diverse range of investors towards Bitcoin exposure.
Increased Liquidity: The trade volumes of ETFs can be significant. If a Bitcoin spot ETF gains interest from institutional and retail investors, the trading volume can translate to enhanced liquidity for Bitcoin itself. This can potentially reduce volatility, which is a common concern associated with cryptocurrencies, potentially leading to a more stable price action over time.
Regulatory Oversight and Security: One of the criticisms often stated against the cryptocurrency world is its perceived lack of regulation. While this isn't entirely true, a Bitcoin spot ETF does bring Bitcoin trading under the purview of SEC regulators. Moreover, since ETFs are held by regulated custodians, the risks associated with hacking and unauthorized access, which have plagued certain cryptocurrency exchanges in the past, are mitigated. Currently, Bitcoin and Ethereum futures are regulated by the Commodities Futures Trading Commission (CFTC) in the U.S.
Potentially Amplified Market Movements: While increased liquidity can buffer against extreme volatility, the sheer volume of funds flowing into and out of the ETF can also amplify market movements. If a significant number of investors decide to move into or out of the ETF simultaneously, it could lead to outsized buy or sell pressures on Bitcoin.
Impact on the Broader Digital Asset Ecosystem: The success of a Bitcoin spot ETF could pave the way for other digital asset spot ETFs such as Ethereum, Cardano, Solana, and others. This may drive institutional and retail interest in the broader crypto market, spotlighting not just Bitcoin but also other digital assets with potential utility and value.
Fee Structures and Cost Implications: Investing in a Bitcoin ETF would come with a fee, often termed as the expense ratio. While direct investment in Bitcoin might eliminate this expense, the convenience, security, and regulatory oversight offered by the spot ETF format could justify the costs for many investors. As an outcome of additional fee revenue, this would also pave the way for more financial institutions and financial advisors to sell these types of securities and participate in the fees generated.
The emergence of a Bitcoin ETF would mark a significant evolutionary step in the blending of traditional finance and the digital asset world. While it offers a several advantages like increased accessibility, regulatory safeguards, and improved liquidity, investors and financial institutions must also weigh potential drawbacks such as fees and market movement amplifications. Regulatory approval is not a given, but it does seem that there are fewer reasons the SEC can use to delay or deny the applications of such instruments. Pressure from the House Oversight committee, the judicial system, financial institutions, and investors will likely force the SEC to deliver new types of guidance and protections along with any potential approval of any digital asset ETF.
References:
Reuters: US SEC does not plan to appeal court decision on Grayscale bitcoin ETF -source (msn.com)
Copyright© 2023 Cannon Financial Institute - All Rights Reserved
Subscribe to Cannon Insights at http://www.cannonfinancial.com/newsletter/subscribe