This past week the Securities and Exchange Commission (the “SEC”) again delayed decisions on whether to approve applications for what would be the first U.S. spot Bitcoin ETF. This comes as no great surprise as the SEC has opted to delay and deny spot Bitcoin ETF applications since as far back as 2013 when the Winklevoss twins first sought approval.

However, the tide appears to be turning as major asset managers like BlackRock, Valkyrie, ARK Invest/21 Shares and Fidelity Investments have thrown their hats into the ring and are optimistic about getting approval for their spot Bitcoin ETF applications. By 10 January 2024, the SEC will have to make a final decision on ARK Invest/21 Shares’ application for a spot Bitcoin ETF and either approve or reject the application. Some analysts speculate that if the SEC approves ARK Invest/21 Shares’ application, it may concurrently greenlight some or all of the other applications in order to avoid picking “winners and losers”.

In denying spot Bitcoin ETF applications to date, the SEC has cited concerns that include risks of fraud and market manipulation in the underlying Bitcoin market and the lack of sufficient surveillance. However, this has not dampened optimism about the approval of a U.S. spot Bitcoin ETF, in part due to the emergence of significant traditional players applying for a spot Bitcoin ETF. Many are now hailing the potential approval as “cryptos big breakthrough on Wall Street” . A recent Nasdaq survey of 500 financial advisors concluded that there is significant investor appetite for risk exposure to digital assets, with 72% of advisors saying that they would be more likely to invest if a spot Bitcoin ETF was offered in the United States.

With Bitcoin seeing strong gains over the past few months, we run through six commonly discussed themes:

(1) The narrative has shifted from crypto winter to optimism over a U.S. spot Bitcoin ETF. The market’s expectation that the SEC will finally approve a spot Bitcoin ETF has been influenced by two significant developments: (i) BlackRock, the world’s largest asset manager, with over $9T in AUM, filed for a spot Bitcoin ETF and this is viewed as a game changer due to BlackRock’s market prominence and its stellar record of ETF approvals with the SEC; and (ii) the D.C. Circuit Court of Appeals ruled unanimously that the SEC must reconsider Grayscale’s spot Bitcoin ETF application after the Court concluded that the SEC had failed to adequately explain why it approved the listing of Bitcoin Futures ETFs but rejected Grayscale’s application for a spot Bitcoin ETF. The Court stated, “in the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful.” The SEC must review Grayscale’s application again and this may open the door to an approval.

(2) Ownership. The spot Bitcoin ETF is an investment vehicle that provides exposure to the price of Bitcoin by directly holding Bitcoin as the underlying asset. This means that the value of the spot Bitcoin ETF will directly align with the current price of Bitcoin. In contrast, Bitcoin futures ETFs track the price of Bitcoin by buying and selling derivatives contracts rather than directly holding the physical asset and can trail the spot price of Bitcoin significantly over time.

(3) Access. The ability to buy Bitcoin through a traditional ETF vehicle, without the complications of buying it on an exchange or managing a wallet, is expected to open the market to new investors, in particular, those more accustomed to traditional financial investments. It is yet to be seen, however, whether a U.S. spot Bitcoin ETF will be a “competitive threat” to crypto exchanges like Coinbase as investors may not need to access the services of a crypto exchange due to the simplified access that a spot Bitcoin ETF would provide.

(4) Regulation. Discussions on digital assets typically touch on the lack of regulation in the space, so one of the reasons why a U.S. spot Bitcoin ETF is so attractive to the investment community is that ETFs are regulated financial products. A spot Bitcoin ETF would be registered with the SEC under the Securities Act of 1933.

(5) Impact. There is real excitement about the potential impact that a U.S. spot Bitcoin ETF would have on mainstream acceptance. The enhanced liquidity that is expected from a U.S. spot Bitcoin ETF, due to the sheer size of the U.S. capital markets, would signal legitimacy that could open the space up to more interest, more regulation, more capital, and more tokenization. BlackRock founder and CEO Larry Fink, one of the more recent vocal advocates for a U.S. spot Bitcoin ETF, stated, “We’re a believer in the digitization of products…ETFs was a big revolution from the mutual fund industry… And we do believe that if we can create more tokenization of assets and securities, and that’s what bitcoin is, it can revolutionize finance.” The ability to tokenise everything, including real world assets such as US treasury bills, and for the world’s largest asset manager to be at the forefront of this movement is significant. The winds of change are also being felt globally, as reflected recently by the UK’s Financial Conduct Authority’s paper outlining an implementation plan for the tokenization of the UK investment funds industry.

(6) Market Manipulation. It remains to be seen how the SEC will get comfortable with the issue of market manipulation. When the SEC rejected VanEck’s spot Bitcoin ETF application in 2021, they highlighted the importance of surveillance-sharing agreements, indicating that an exchange that lists Bitcoin-based ETFs can meet its obligations under the Exchange Section Act by “demonstrating that the exchange has a comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying or reference bitcoin assets.” Coinbase has agreed to surveillance-sharing agreements with both CBOE and Nasdaq, and Coinbase is listed as custodian on five of the twelve spot Bitcoin ETF applications that are currently before the SEC. However, it remains to be seen whether this will be sufficient for the SEC.