If there weren’t enough excitement about fund companies’ race to launch the first spot-price bitcoin exchange-traded fund, now these offerings have become engulfed in Hollywood-style courtroom drama as well, as fund company developers clash with the Securities and Exchange Commission over things like illegal crypto activity, market manipulation and surveillance.
Over the past few years, no less than 30 spot-bitcoin applications have faced rejection, according to Bloomberg Intelligence data. Regulators have cited concerns about investor protections and market manipulation in the cryptocurrency market. That has led to calls for surveillance so regulators can keep tabs on who’s trading and watch for illicit activity. Meanwhile, the SEC has also come down on exchanges like Coinbase; it filed a lawsuit against the platform earlier this month, claiming Coinbase is operating illegally as an unregistered exchange.
Last week, BlackRock filed paperwork with the SEC to launch the iShares Bitcoin Trust. Since BlackRock is the planet’s largest asset manager, with around $9 trillion in assets, ETF industry watchers saw it as the firm whose filing was most likely to win the first approval.
Unlike previous spot-bitcoin applications, BlackRock’s filing has a unique “surveillance-sharing agreement” with the Nasdaq stock exchange to monitor any possible illegal cryptocurrency activity. The arrangement would allow firms to share customer data, including trading activity, clearing activity and customer identities. The hope is that BlackRock’s surveillance method would quell the SEC’s concerns about market manipulation.
But even if BlackRock wins approval, it might not be fast enough to win first place in the bitcoin fund race. Grayscale Investments, a New York-based manager of cryptocurrency trusts, might get there first.
However, Grayscale has been embroiled in a legal battle of its own with the SEC, one that dates back to last summer, when the agency denied the firm’s application to convert its Grayscale Bitcoin Trust (GBTC) into an ETF. A lawsuit ensued, and oral arguments were heard in March.
“We now think Grayscale is 70% likely to win,” said Elliot Z. Stein, a senior litigation analyst at Bloomberg Intelligence, who added that a ruling is expected in the second or third quarter. Stein believes the court will vacate the SEC’s order rejecting Grayscale’s conversion application, which should pave the way for a spot-bitcoin ETF. If Grayscale wins its legal battle, it could beat BlackRock to the punch.
This week, the story took on another twist when rumors surfaced that Fidelity Investments might buy Grayscale. If it prevailed in its legal fight against the government, Grayscale would indeed become an attractive target, especially for Fidelity, which is both pro-bitcoin and an archrival to BlackRock.
Bitcoin’s market cap is more than $512 billion. That pales next to established asset classes like stocks, bonds, commodities and real estate, but the crypto market would likely kick into higher gear if a spot-bitcoin ETF were approved, a development that would further legitimize digital currencies. The SEC’s critics argue that the lack of a spot-bitcoin ETF and rules governing digital currencies are hindering economic progress in the U.S.
Over in Canada, the Purpose Bitcoin ETF (BTCC) was launched on the Toronto Stock Exchange in February 2021, making it the first official spot-priced cryptocurrency fund in the world.
But attempts in the U.S. to mimic the Purpose fund’s successful navigation of regulatory obstacles have consistently failed. The anti-cryptocurrency sentiment at the SEC has at the same time reached a fever pitch, with Gary Gensler, the agency’s chairman, publicly lashing out at crypto.
Public drama aside, there could be a spot-bitcoin ETF launch much sooner than some expect.