Institutions are vying to apply for Bitcoin ETFs. Will the SEC's stubborn refusal to approve change?

This article was published on Blocklike, author: Blocklike Editorial Team.

Asset management giant Fidelity recently submitted a Bitcoin Exchange-Traded Fund (ETF) registration application to the U.S. Securities and Exchange Commission (SEC).

Fidelity's ETF application is just the latest among many. After a large number of Bitcoin ETF applications were submitted to the SEC in the past two months, the SEC's stubborn refusal to approve them may soon reach its limit.

In February, the first North American ETF backed by BTC rather than derivatives was launched. This ETF, named Purpose Bitcoin ETF, became one of the first Bitcoin funds available to ordinary investors globally. On its first day of trading, this Bitcoin ETF set a new high of nearly $165 million. It held over 10,000 BTC in just one week. Subsequently, although trading slowed down, this ETF surpassed 1 billion Canadian dollars (approximately $800 million) within a month of its establishment.

From the market's public feedback, it seems that many did not anticipate the popularity of this Bitcoin ETF. Currently, the Purpose Bitcoin ETF has become a preferred investment tool for institutions.

According to blockchain data platform Glassnode, as of March 22, the number of Bitcoin ETFs held has reached 14,659.99 BTC.

SEC Commissioner and "Crypto Mom" Hester Peirce also commented that if Bitcoin ETFs are not approved, the U.S. may lose its first-mover advantage.

Many institutions from Wall Street have become active around Bitcoin ETFs.

A Wave of ETF Applications

In July 2013, well-known American investors the Winklevoss twins first submitted a Bitcoin ETF application to the SEC, pioneering the way for ETF applications. ETF stands for Exchange Traded Fund, which is an open-end fund that can be traded on stock exchanges. Fund management companies can issue new fund shares to investors at any time and must also buy back the shares held by investors upon request. Through Bitcoin ETFs, many companies and institutions in the U.S. looking to purchase Bitcoin have further resolved compliance issues, reducing the risks and barriers to investing in Bitcoin.

For retail investors in the U.S., ETFs are considered very favorable products for ordinary investors to purchase in the U.S. stock market, allowing investors to trade a basket of assets. Bitcoin ETF stocks can track the price of Bitcoin, enabling investors to trade Bitcoin effectively in the stock market. For a long time, Bitcoin ETFs have been highly anticipated.

In the long years since 2013, several institutions have made similar attempts but have been rejected by the SEC. According to publicly available information, an incomplete count by foreign media shows that eight companies have successively applied to the SEC for Bitcoin ETFs but have not succeeded.

The SEC's reasons for rejection mainly include "issuers cannot guarantee the potential market manipulation of Bitcoin," "the price volatility of Bitcoin is enormous," and at that stage, "the Bitcoin custody mechanism is not mature," among others. The SEC has taken a very cautious attitude towards Bitcoin as an alternative asset.

At the end of 2020, as Bitcoin prices continued to break through and the crypto market heated up, coinciding with a change in SEC leadership with former Chairman Jay Clayton stepping down, the possibility of Bitcoin ETF applications being approved was raised again, and the SEC may not have much time left to consider.

In contrast, Canada, which has long been part of the North American market, took the lead in approving Bitcoin ETF applications. At the beginning of 2021, Canadian asset management companies Purpose Investments and Evolve Funds received approval from the Ontario Securities Commission (OSC) to issue Bitcoin ETFs, and the first Purpose Bitcoin ETF was welcomed by the market.

In Canada, three Bitcoin ETFs were approved and listed in February: Purpose Bitcoin ETF (ticker BTCC), Evolve Bitcoin ETF (EBIT), and CI Galaxy Bitcoin Fund (BTCX).

Interestingly, behind the first two ETFs launched, Gemini Trust Company seemingly stood behind both, providing secondary custody. After multiple rejections of Bitcoin ETF applications, Gemini founders and well-known crypto investors the Winklevoss twins' strategy of shifting to Canada seems to have succeeded.

According to documents from the Canadian electronic filing and retrieval system (SEDAR), other proposed Bitcoin ETFs are also awaiting approval, including those submitted by Horizons ETF Management (Canada), Arxnovum Investments, and Accelerate Financial, which have released preliminary decision documents.

Although Canada has successfully issued two Bitcoin ETFs, there is still a gap in the number of market participants and market activity between the two listing paths in the U.S. and Canada. Currently, Bitcoin prices have already reached a new high of over $60,000, with a total market capitalization exceeding $1 trillion.

Huobi Research Institute pointed out in a report that the current market size in the U.S. is about 27 times that of the Canadian market. In the case where U.S. retail investors cannot easily purchase Canadian ETF products, if the U.S. approves Bitcoin ETFs to enter the market, the trading volume of Bitcoin ETFs is likely to experience explosive growth driven by investor enthusiasm. Although Canadian regulators were inspired by the various advantages of crypto ETF products and took the lead in launching this product, the vastness and complexity of the U.S. market may lead to more concerns, making it difficult to follow the same innovative path as Canada.

At a time of strong institutional demand, a wave of Bitcoin ETF applications is once again flooding the SEC.

On January 22, during the "transition period" of the SEC's leadership change, U.S. investment management company VanEck reiterated its Bitcoin ETF application, proposing to launch the VanEck Vectors Digital Assets ETF, which will track the price and performance of the MVIS (a digital asset index provider) global digital asset stock index. At the same time, the Chicago Board Options Exchange (Cboe) has also submitted documents requesting the listing of VanEck's proposed Bitcoin ETF. Recently, the SEC announced that the review period for the VanEck Bitcoin ETF application has begun, lasting 45 days. If approved, this ETF could become the first open Bitcoin exchange-traded product in the U.S.

On March 20, Skybridge Capital submitted a Bitcoin ETF application to the SEC. Earlier in January, Skybridge Capital had launched a Bitcoin fund.

Also in March, New York City-based asset management company WisdomTree Investments submitted an application to the SEC to launch a Bitcoin ETF, with the trust shares intended to be traded on the Chicago Board Options Exchange. The Bitcoin ETF application submitted by NYDIG intends to list its NYDIG Bitcoin ETF on the New York Stock Exchange (NYSE).

In the application for the "U.S. Stocks + Bitcoin ETF" (NASDAQ: SPBC) submitted by Simplify Asset Management, there is also a non-traditional combination of stocks and cryptocurrencies for investors to choose from. For this combination fund, 15% of the total assets will be used to invest in the Grayscale Bitcoin Trust (GBTC), indirectly investing in Bitcoin.

Compliant Investment Tools for Mainstream Funds

In the face of this new wave, Grayscale is also preparing. Grayscale has released multiple ETF-related job postings in official information, sparking market speculation.

For a long time, entering the crypto market through Grayscale's Bitcoin Trust has been the main channel for traditional institutional investors to purchase Bitcoin. ETFs allow market makers to freely create and redeem shares, and if liquidity is sufficient, occurrences of premiums or discounts will be rare. In traditional markets, their risks are also considered much lower than those of closed-end trust funds like GBTC, and ETF tools are more easily accepted by public funds and pension funds, making Canadian ETFs potentially more popular.

In an interview on March 24, Grayscale CEO Michael Sonnenshein publicly stated that Grayscale is taking a wait-and-see attitude towards applying for a Bitcoin ETF and is preparing for this possibility. However, the SEC may still not be ready to approve a Bitcoin ETF.

While the market continues to debate the SEC's attitude, the "ETF effect" has already begun to spread.

First, there were movements in South America. On March 19, Brazil approved the first Bitcoin ETF in South America, issued by asset management company QR Asset Management, which will be listed on the Brazilian stock exchange B3 under the ticker QBTC11, expected to enter open trading in June this year.

On the other hand, this effect has also reached ETH. After issuing the Bitcoin ETF, in early March, Evolve again submitted its preliminary prospectus for an Ethereum ETF (ETHR) to Canadian securities regulators (CSA). According to official information, ETHX will directly invest in Ethereum, and its assets will be priced using the Bloomberg Galaxy Ethereum Index, which is also the settlement index for Ethereum futures contracts on the CME.

Whether various crypto ETF applications will be approved will become a key focus for the market moving forward.

Huobi University President Yu Jianing publicly analyzed that "the successful approval of the Bitcoin ETF means that as long as there is a compliant stock account, Bitcoin can be indirectly purchased. For the Bitcoin market, the number of users will increase by an unimaginable magnitude, including traditional retail and institutional investors who can purchase Bitcoin in large quantities, leading to another dimension of upgrade in the market."

At this stage, the market is still eager for new funds to enter. If Bitcoin-based ETFs can be issued and circulated, there will be new expectations for the influx of large amounts of user funds into the market.

Some industry observers have also noted the huge demand among institutions. In early March, Mathew McDermott, head of digital assets at Goldman Sachs, released a survey result indicating that among institutional clients surveyed by Goldman Sachs, more than one-third reported currently holding digital assets, and over half of institutional clients plan to expand their digital asset portfolios in the coming months. They are witnessing the enormous demand from institutions for Bitcoin and the crypto market, and there are no signs of any weakening in institutional demand.

The institutional demand being discussed includes the entire industry sector, referring to hedge funds, asset management companies, macro funds, banks, corporate finance executives, insurance, and pension funds. Most institutional clients are actually discussing Bitcoin. Loose monetary policies have driven institutional demand for digital assets. Regarding the SEC's approval status for Bitcoin ETFs, we may have optimistic expectations.