Exchange-traded fund approval fails to light fire under utility-free BTC

America’s securities regulator has approved BTC spot-based exchange-traded funds (ETFs), leaving irony-impaired BTC maximalists cheering their regulatory gelding by the Wall Street titans they once claimed to despise.

On January 10, following the last-minute flurry of amended filings by BTC ETF applicants, the U.S. Securities and Exchange Commission (SEC) announced that its five members had decided that “the Proposals are consistent with the Exchange Act and rules and regulations thereunder applicable to a national securities exchange.”

The approval covers the Grayscale Bitcoin Trust, Bitwise Bitcoin ETF, Hashdex Bitcoin ETF, iShares Bitcoin Trust (BlackRock), Valkyrie Bitcoin Fund, ARK 21Shares Bitcoin ETF, Invesco Galaxy Bitcoin ETF, VanEck Bitcoin Trust, WisdomTree Bitcoin Fund, Fidelity Wise Origin Bitcoin Fund and Franklin Bitcoin ETF.

Public trading of the new ETFs is expected to start first thing Thursday morning, particularly for the last six on the list above, all of which were declared ‘good to go’ by the Chicago Board Options Exchange (CBOE) ahead of the SEC’s announcement. Robinhood Markets CEO Vlad Tenev tweeted that his firm planned to list all 11 ETFs “as soon as possible.”

The approval came despite the SEC’s earlier concerns about the ease with which the fiat value of the BTC token can be manipulated via wash trading on exchanges like Binance with stablecoins like Tether (USDT).

Binance recently reached a $4.3 billion legal settlement with the U.S. Department of Justice, while Tether recently claimed to have ‘onboarded’ U.S. federal authorities to its systems. However, there are always other exchanges and other stablecoin issuers willing to circumvent the rules for a price, so what exactly has changed?

The majority of the ETF applicants have inked deals with the U.S.-based Coinbase
(NASDAQ: COIN) exchange to provide market ‘surveillance’ and alert the SEC as to activities that appear intended to manipulate BTC’s fiat price. But critics have pointed out that Coinbase’s trading volume is dwarfed by its international rivals and thus Coinbase lacks the capacity to detect significant manipulation efforts.

The SEC said Wednesday that “a comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying or reference [BTC] assets is not the exclusive means by which” an ETF listing could meet its obligations under the Exchange Act. The SEC claims that “sufficient ‘other means’ of preventing fraud and manipulation in this context have been demonstrated.”

Comparing data from the Chicago Mercantile Exchange’s (CME) regulated BTC futures market with the “stationary time series of price returns data at hourly, five-minute, and one-minute intervals for the spot BTC/USD trading pair on Coinbase and Kraken, as well as for the closest-to-maturity CME [BTC] futures contract,” the SEC concluded that the CME has been “consistently highly correlated with this subset of the spot BTC market throughout the past 2.5 years.”

The SEC thus concluded that “fraud or manipulation that impacts prices in spot [BTC] markets would likely similarly impact CME futures prices.” As such, the SEC believes the CME data “can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices.”

Through gritted teeth

The vote was closer than some might have imagined, with the two Democratic commissioners voting against approval and the two Republicans voting in favor. Gensler cast the deciding vote, despite his oft-stated opposition to ‘crypto’ ETFs.

Gensler issued a statement noting his office’s previous rejections of BTC ETF applications, but acknowledging that “circumstances … have changed.” Referencing the August 2023 court order for the SEC to reconsider Grayscale Investment’s application to convert its GBTC ETF from futures-based to spot-based, Gensler’s opinion is that “the most sustainable path forward is to approve the listing and trading of these spot [BTC ETF] shares.”

Gensler took pains to point out that the SEC “did not approve or endorse” BTC. Gensler noted that the underlying assets in metals-based ETFs “have consumer and industrial uses,” while BTC is “primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.”

Gensler also emphasized that Wednesday’s decision was restricted to “one non-security commodity,” i.e. BTC. (Gary evidently remains in the dark that controversial changes to the Bitcoin protocol that produced BTC clearly make it an unregistered security, but we digress.) Gensler warned that the SEC’s acquiescence on BTC ETFs “should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities.” That warning is a clear shot at those who expect that a deluge of Ethereum-based ETF applications and approvals will follow Wednesday’s decision. Gensler has gone on record calling ETH a security (and he’s not alone in that opinion), particularly following Ethereum’s 2022 shift from a proof-of-work consensus mechanism to one based on proof-of-stake.

The belief that the SEC’s hand was forced by last summer’s federal court ruling was evident in the various individual statements issued by four of the five SEC commissioners. Commissioner Hester ‘Crypto Mom’ Peirce’s statement said the ETF “saga likely would have spanned well beyond a decade were it not for the DC Circuit-ex-machina.” Commissioner Caroline Crenshaw’s dissent challenged the SEC’s claim that CME monitoring will adequately protect consumers. Crenshaw said BTC trading is “so susceptible to manipulation, so rife with fraud, so subject to volatility, and so limited in oversight that we cannot credibly say that the proposed rule changes approved today were designed to prevent fraud and manipulation or that there are adequate investor protections in place.”

Twitter jitters

Wednesday’s announcement briefly appeared on the SEC’s website ahead of the official release, only to be swiftly replaced by a ‘404’ error message. This caused no shortage of ulceration among the jittery BTC maxis who had been duped by this exact type of fake-out just the day before.

On Tuesday, the SEC’s official Twitter/X account was hacked and an unauthorized tweet was issued that claimed the ETFs had been approved. This caused an immediate spike in BTC’s fiat price that quickly gave up its gains (and then some) when the SEC announced that the tweet was bogus and that its account had been compromised due to its lack of two-factor authorization.

This prompted outrage among maxis as well as on Capitol Hill, where Gensler is already something of a Republican boogeyman. Within hours, two senators—Jody Vance (R-OH) and Thom Tillis (R-NC)—fired off an angry letter to Gensler demanding an accounting of the SEC’s shoddy security practices.

Number go, er, sideways?

Despite the frantic hype machine that saw BTC’s fiat value nearly triple over the past year, the token’s price barely budged following confirmation that Wednesday’s announcement was legit. Those expecting a SpaceX-style liftoff were instead presented with something resembling the C’mon, Do Something meme where a frustrated character pokes an inert object with a stick.

For weeks now, backers and skeptics have warned that ETF approval was already ‘baked in’ to BTC’s current price, with some even suggesting that confirmation would be a ‘sell the news’ event. If anything, Wednesday’s limp reaction reflects the fact that no one really knows why BTC’s price goes up or down, outside of those aforementioned wash traders who prime the pump and reap the dump.

It remains to be seen just how great the demand is for ETF investing among the general public. Some investment strategists are already likening the ETFs to a good place for nest-eggers to put one’s “lottery ticket money.” (The ‘future of finance,’ indeed.) Institutions may also view ETFs with a skeptical eye, at least initially, based on the disastrous experiences of some pension funds that dipped their toes into the ‘crypto’ waters only to have their feet fall off.

Should the ‘experts’ be off in their predictions of a torrent of new money flooding in, BTC maxis will likely transfer their hype machine efforts to the halving of BTC’s block reward sometime in April. Like the Great Disappointment, there’s always a new promise of salvation just over the horizon, one that will surely come true this time. So buy now, cuz Daddy needs exit liquidity.

Fee-for-all

Regardless of how many investors may be interested in adding BTC-adjacent securities to their investment portfolio, the SEC’s announcement signals the start of a cutthroat competition to acquire them. The recent flurry of amended filings saw nearly all ETF applicants cutting their management fees to either match or undercut their competitors.

Multiple applicants—including ARK 21Shares, Bitwise, Fidelity, Valkyrie and WisdomTree—have pledged to waive their fees entirely to start. Following grace periods that range from three to six months (or the reaching of a certain dollar figure for total assets under management), most ETFs are promising annual fees of between 0.2 and 0.5%.

There are a few notable outliers. Hashdex is charging 0.9% out of the gate, while Grayscale is sticking with 1.5% as it converts from a futures-based to spot-based ETF. That’s down from the 2% that Grayscale charged its futures customers, but Grayscale is the only profitable unit of its struggling parent company Digital Currency Group (DCG), so Barry Silbert is going to squeeze this lemon for all the juice it’s got left.

Silbert is apparently betting that investors holding Grayscale’s GBTC futures shares are either too lazy to cash out and reinvest in a different ETF with lower fees, or they don’t want to pay the taxes on the capital gains they may have made since they first bought GBTC, particularly if BTC’s value is truly moon-bound.

Temporary custody

Two U.S. exchanges—Coinbase and Gemini—will handle custody for nearly all the ETF issuers, despite the fact that both firms are currently being sued by the SEC for offering unregistered securities. Both firms have been hyping the allegedly vast revenue potential of their new duties, although that potential could thin dramatically as the big Wall Street firms come to understand more about the functioning of these newfangled digital Beanie Babies.

On Wednesday, Wired quote Austin Reid, head of business at institutional crypto prime brokerage FalconX, agreeing that there are clear “opportunities for growth” for digital asset operators in the short-term. But down the road, as the tradfi giants get more comfortable with the technical complexities of storing BTC, they could “cannibalize portions of the market” by cutting out these middlemen.

Coinbase and Gemini could also inadvertently self-cannibalize their respective platforms’ trading fee revenue. Even when those ETF waivers expire, the management fees are far less than the exchanges charge to trade BTC on their platforms. For now, the ETF custody fees might cover the retail business the exchanges might lose, but if BlackRock figures out that storing tokens really isn’t that hard…?

We’ll close our coverage with the line of the day from tech blogger/Wikipedia super-editor Molly White: “Finally, people will be able to turn their money into an anonymous peer-to peer asset outside of government control, to which they own their own keys and thus control completely, without having to involve powerful financial institutions like BlackRock.”

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