For months, almost a dozen providers have been waiting for the green light from the US Securities and Exchange Commission (SEC) to launch the first spot-based Bitcoin ETF. Today is the day. The SEC has approved all outstanding Bitcoin ETF applications, paving the way for exposure to an exceptionally broad investor base.
Crypto product providers have been applying to the SEC for exchange-traded Bitcoin funds (ETFs) for over a decade. The first breakthrough came in October 2021 with the launch of a futures-based ETF. The SEC continued to reject funds with the direct price of Bitcoin ("spot"). Just over two years later, the pressure from Wall Street banks overwhelmed the authority. The SEC has just approved eleven different spot-based Bitcoin ETFs, according to an official statement.
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The battle for a spot Bitcoin ETF
An ETF is an investment fund that is traded on stock exchanges and represents investors' exposure to a portfolio of assets such as shares, bonds or commodities. A distinction is generally made between two types. Futures-based ETFs track the performance of the underlying assets via futures contracts, while spot-based ETFs track the performance of assets based on their actual market prices. In the case of Bitcoin, futures-based ETFs have some disadvantages for investors - especially in uptrends.
The legal victory of crypto conglomerate Grayscale against the Securities and Exchange Commission (SEC) gave the applicants a decisive boost in August. A three-member appeals panel in Washington D.C. ruled unanimously that the categorical rejection of spot-based Bitcoin ETFs was arbitrary. In addition, there was the application of the world's largest asset manager, BlackRock.
Providers join fee war
Over the past few weeks, BlackRock, VanEck, Valkyrie, Bitwise, Invesco, Fidelity, WisdomTree, Grayscale, Hashdex and a joint venture between Ark Investments and 21Shares amended their applications several times. These clarified all the details that the regulator identified as deficiencies in dozens of meetings. All of the applications contained similar provisions regarding market manipulation prevention and market surveillance, which is why the SEC gave the spot Bitcoin ETFs a uniform green light.
In the run-up to the approval, some of the issuers were already undercutting each other in terms of the fees for their products. Bitwise started the lowest with an annual management fee of 0.24% - compared to 0.54% for standard US ETFs. VanEck as well as Ark and 21Shares announced a fee of 0.25% and BlackRock planned 0.3%. But just this morning, BlackRock lowered the management fee of the iShares Bitcoin Trust to 0.25% and the ARK 21Shares Bitcoin ETF followed suit with a cut to 0.21%. The unprecedented fee war even before the spot Bitcoin ETFs were approved underlines how keen providers are to secure a share of the expected capital inflows.
Controversial decision within the SEC
The controversial nature of the approval of a spot Bitcoin ETF within the SEC is underlined by the statements of the individual commissioners. Chairman Gary Gensler was once again critical of the sector in a blog post. He stated that the authority had now approved a spot ETF due to the legal setback against Grayscale. However, this would not change the fact that the vast majority of all crypto-assets violate federal securities laws. Bitcoin is also a purely speculative investment anyway.
"Though we’re merit neutral, I’d note that the underlying assets in the metals ETPs have consumer and industrial uses, while in contrast bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing. While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto." - Gary Gensler, SEC Chairman
SEC Commissioner Caroline Crenshaw criticized the sector even more strongly. She expressed extreme concern that these products will flood the markets and end up directly in the retirement accounts of US households who cannot afford a total loss due to "apparently widespread fraud and market manipulation". Commissioner Hester Peirce and Commissioner Mark Uyeda once again took the opposing stance.
"We have alienated a generation of product innovators within our space. Our unreasonable approach to these applications has signaled that regulatory prejudice against new products and services can lead us to sidestep the law and unreasonably delay product launches. The industry has logged hundreds of meetings, has filed submissions, withdrawals and amendments, and ultimately had to resort to a costly legal battle to get us to today." - Hester Peirce, SEC Commissioner
In the end, the SEC approved the spot bitcoin ETFs by a vote of three to two, with Gensler casting the deciding "yes" for the majority.
