Crypto investors worldwide are anxiously awaiting a long-awaited ruling from the U.S. Securities and Exchange Commission (SEC) that could finally approve the trading of a spot bitcoin exchange-traded fund (ETF). This decision comes more than a decade after initial attempts to introduce a bitcoin ETF were rejected by the SEC. This time, however, things seem to be different, with 13 companies filing applications for a spot bitcoin ETF. These companies include Grayscale Bitcoin Trust, Ark/21Shares Bitcoin Trust, Bitwise Bitcoin ETF Trust, BlackRock Bitcoin ETF Trust, VanEck Bitcoin Trust, WisdomTree Bitcoin Trust, Valkyrie Bitcoin Fund, Invesco Galaxy Bitcoin ETF, Fidelity Wise Origin Bitcoin Trust, Global X Bitcoin Trust, Hashdex Bitcoin ETF, Franklin Templeton Digital Holdings Trust, and Pando Asset Spot Bitcoin Trust.
The applications for a spot bitcoin ETF consist of two main components. The first component is a 19b-4 filing, which serves as a form used by exchanges to inform the SEC of a proposed rule change. Since a spot bitcoin ETF is a novel product, a rule change is required under the Securities Exchange Act of 1934. The exchanges involved in this process, namely NYSE, Nasdaq, and Cboe, must provide detailed rules explaining how the product will be traded. The SEC must approve these rule changes before the spot bitcoin ETF can be traded. The Ark/21Shares Bitcoin Trust’s 19b-4 filing is facing a deadline of January 10.
The second component of the applications is the approval of S-1. This filing is made to register a new security with the SEC and provides comprehensive information about the specific security being proposed. Each company filing for a spot bitcoin ETF has slight differences in the way the product could be structured. For example, the Grayscale Bitcoin Trust requires the approval of an S-3 filing, which is a simplified security registration form for businesses that have already met certain reporting requirements. It is widely expected that once the 19b-4 filings are approved, the SEC will subsequently approve the S-1 applications of all the ETF applicants simultaneously. However, due to the variations in the applications, it is not guaranteed that all S-1 applications will be approved.
With 13 companies vying for a bitcoin ETF, all offering similar products, market participants are eager to understand the fee structures that will be implemented. Fidelity’s Wise Origin Bitcoin Fund has already announced it will charge 39 basis points (0.39%). Invesco’s Galaxy Bitcoin ETF, on the other hand, has set its expense ratio at 59 basis points, which will be waived for the first six months and the first $5 billion in assets. Ark/21Shares and Valkyrie have chosen to charge 80 basis points. The Grayscale Bitcoin Trust currently imposes a 2% fee but has expressed its commitment to reducing the fee once its application to convert to a bitcoin ETF is approved. Other applicants have not yet disclosed their fee structures.
It is crucial to consider the backdrop against which these developments are unfolding: SEC Chair Gary Gensler’s ongoing battle with the crypto industry. Gensler has been engaged in several court battles against major crypto players, including a high-profile case against Grayscale Bitcoin Trust, which resulted in the SEC’s loss last summer. In that case, the U.S. Court of Appeals for the D.C. Circuit ruled that the SEC had already approved a futures-based bitcoin product and failed to adequately explain its refusal to approve a spot bitcoin product. The court argued that futures and the spot market are comparable products, so if one is approved, the other should logically be approved as well.
Although bitcoin has been classified as a commodity, other cryptocurrencies do not yet have similar classifications, except for ether. In the absence of clear federal rules, the SEC has resorted to regulatory enforcement actions as a means of asserting its authority over much of the crypto industry. Notably, the SEC has an ongoing case against Coinbase, the largest U.S. crypto exchange. The SEC alleges that Coinbase violated rules mandating its registration as an exchange and that some of the crypto assets traded on the platform are securities falling under the SEC’s purview. Additionally, the SEC sued Binance and its founder Changpeng Zhao, accusing them of engaging in deceptive practices and conflicts of interest. While the case is ongoing, Zhao has pleaded guilty to money laundering charges and accepted a government monitor for Binance.
The decision on a spot bitcoin ETF by the SEC is eagerly awaited by the crypto community. The components of the applications, the fee structures, and the ongoing regulatory battles all contribute to a complex landscape surrounding the potential approval of these ETFs. It remains to be seen how the SEC will navigate this challenge and what implications it will have for the broader crypto industry.
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