Asset management giants apply for Bitcoin ETF against the trend, and the launch of EDX Markets is not a coincidence?

Written by: flowie, ChainCatcher

Following the submission of a Bitcoin spot ETF application by BlackRock, the world's largest asset management company, to the U.S. SEC, asset management firm WisdomTree submitted another spot Bitcoin ETF application on June 20, seeking approval to launch the WisdomTree Bitcoin Trust. Meanwhile, another U.S. asset management giant, Fidelity Investments, is rumored to be considering acquiring Grayscale and applying for a Bitcoin spot ETF.

Despite many people being skeptical about traditional financial giants like BlackRock applying for a Bitcoin spot ETF against the backdrop of the SEC's crackdown on crypto, and finding the timing perplexing, it is clear that money is being used to vote. Since BlackRock's application for a spot Bitcoin ETF, the daily trading volume of Grayscale's Bitcoin Investment Trust (GBTC) has increased from $16.1 million to nearly $80 million, an increase of about 400%.

At this juncture, the digital asset market EDX Markets, supported by Citadel Securities, Fidelity Investments, and Charles Schwab, announced the official launch of trading services and completed a new round of financing. As soon as the news broke, the crypto market experienced a long-awaited rally, with Bitcoin briefly surpassing $29,000.

This seems to further confirm that while U.S. regulators are sharpening their knives against crypto companies, "Wall Street is starting to act." Caitlin Long, CEO of digital asset bank Custodia, bluntly stated, "This is not a coincidence; the crackdown on cryptocurrencies has cleared the way for Fidelity-backed exchanges and BlackRock's Bitcoin ETF."

Currently, it is a consensus among many in the crypto community that BlackRock's application for a spot Bitcoin ETF is likely to be approved, despite the SEC having rejected dozens of applications for Bitcoin spot ETFs from institutions including Grayscale, ARK, and 21Shares. If BlackRock succeeds, the first spot Bitcoin ETF in the U.S. will be born. Many crypto KOLs compare this situation to the launch of the world's first gold ETF 20 years ago, defining it as a crucial milestone for Bitcoin and the crypto sector to enter a bull market.

However, the "abnormal" entry of traditional financial giants with close ties to regulators at such a special time has raised concerns about the potential "collusion" manipulation of crypto. What does BlackRock's application for a spot Bitcoin ETF really mean? What details are worth exploring behind this? This article attempts to analyze and clarify some points.

The Myth of BlackRock's "Counter-Trend" Move

Last week, BlackRock's iShares submitted an application to the U.S. Securities and Exchange Commission (SEC) for something called the "iShares Bitcoin Trust," with Coinbase Custody Trust Company as the custodian for holding Bitcoin.

Subsequently, foreign media represented by CoinDesk defined this move as "BlackRock is applying for a Bitcoin spot ETF," and extensive reports followed. Since Trust and ETF are entirely different investment vehicles, there has been confusion and disagreement about whether BlackRock is applying for a trust or an ETF. Crypto and financial KOLs and analysts, represented by Morgan Creek Digital co-founder Anthony Pompliano, Pomp Investments investor Anthony Pompliano, CEHV partner Adam Cochran, and Bloomberg senior ETF analyst Eric Balchunas, have debated this issue.

In summary, one side believes that BlackRock is essentially applying for a Bitcoin trust similar to Grayscale's Bitcoin Trust (GBTC), except that it is redeemable. Due to the trust structure, GBTC investors can only buy and cannot redeem, and the number of shares cannot be determined by supply and demand, which exacerbates the discount to the fund's net asset value. This means that the closing price of GBTC shares is far below the actual Bitcoin price corresponding to each GBTC share. Consequently, GBTC has previously applied to the SEC multiple times to convert its trust into a spot ETF, but was rejected. However, according to the original application document from BlackRock, the trust will issue and redeem shares in units of 40,000 shares or its multiples.

On the other hand, those who identify it as a Bitcoin ETF argue that although the application document states it is a trust, it is equivalent to an ETF. BlackRock is applying for a redeemable trust form of ETF, raising funds in the form of a trust fund and then issuing shares to be listed as an ETF. Many commodity ETFs, such as gold ETFs, are also in a similar form. Besides the redeemable mechanism mentioned above, unlike GBTC, ETFs can be traded on stock exchanges, while GBTC can only be traded over-the-counter, giving ETFs better liquidity and legality. From BlackRock's application document, it is clear that the trust shares will be listed on NASDAQ.

BlackRock's application is neither a traditional trust nor fully compliant with an ETF, placing this application in the first gray area. From the current perspective, although BlackRock is applying for a Bitcoin trust, people are more inclined to equate it with a Bitcoin spot ETF.

And compared to whether it is a trust or an ETF, what may be more important is BlackRock's emphasis on which act it is following. BlackRock clearly states in its application document that it follows the Securities Act of 1933, rather than the Investment Company Act of 1940, and certainly not the Commodity Exchange Act of 1936. "This trust is not registered as an investment company under the amended Investment Company Act of 1940 ('Investment Company Act'), and the sponsor is not registered with the SEC as an investment advisor and is not subject to SEC regulation regarding its activities related to the trust. Under the amended Commodity Exchange Act of 1936 ('Commodity Exchange Act' or 'CEA'), the trust is not a commodity pool, and the sponsor is not subject to the CFTC as a commodity pool operator or commodity trading advisor for the trust."

Clearly, BlackRock hopes to negotiate a more lenient and transparent regulatory approach with the SEC. At the same time, BlackRock does not want to be subject to CFTC regulation due to the "commodity" nature of Bitcoin.

Although both the 1933 and 1940 Acts were established for a more stable financial market regulatory framework, they emphasize different requirements.

The 1940 Act emphasizes regulation of retail financial products, requiring registration with the SEC to offer securities in the public market. The 1933 Act primarily emphasizes transparency for financial products to investors, with looser requirements for the issuance process, not requiring registration, but needing to provide the SEC with practices to "prevent fraud and market manipulation" and "protect investors and the public interest."

Therefore, for better monitoring, most past Bitcoin futures ETFs have followed the 1940 Act. However, it is noteworthy that Teucrium's Bitcoin futures ETF was approved under the Securities Act of 1933 last April, which was seen as a watershed moment for SEC regulation.

Unfortunately, Grayscale's attempt to follow the 1933 Act for its Bitcoin spot ETF application in July did not succeed. This has led to accusations of inconsistency against the SEC. The SEC's main reason for rejecting past Bitcoin spot ETFs from Grayscale and others was that market manipulation is a long-standing issue in the spot market, and Bitcoin trading on unregulated platforms is difficult to monitor. Although the SEC has approved Bitcoin futures ETFs, these ETFs are all on platforms regulated by U.S. financial authorities. Yet it also approved Teucrium's Bitcoin futures ETF under the 1933 Act, submitting practices to "prevent fraud and market manipulation."

These past application backgrounds have also left the public in a fog regarding BlackRock's current application. BlackRock also clearly pointed out in its application document the SEC's reasons for rejecting Bitcoin spot applications—there is a risk of market manipulation due to trading platforms, and it is explicitly stated that following the 1933 Act makes it even more difficult to pass the Bitcoin spot ETF application; additionally, BlackRock listed Coinbase, which the SEC recently charged, as the Bitcoin custodian. Under these various application myths, what does BlackRock's Bitcoin spot ETF application signify?

Gold ETF and "Digital Gold" ETF

Although the SEC has never approved a Bitcoin spot ETF, BlackRock's "counter-trend" application seems to hint at a different atmosphere.

As the king of ETFs, BlackRock has rarely faced application failures. Foreign media Finbold provided a set of data on BlackRock's application success rate, stating that BlackRock has a record of 575-1 in SEC-approved ETFs. This means the SEC has approved 575 of BlackRock's ETFs, rejecting only one in October 2014, and the reason for that rejection was that BlackRock sought approval to create an actively managed ETF that did not require daily disclosure of holdings.

This success rate showcases the strength of BlackRock, the world's largest asset management giant managing nearly $10 trillion in assets. It brings together the world's best analysts and researchers, with an understanding of the industry and policies, as well as an enormous network of relationships, while maintaining a close relationship with the SEC.

At a time when the SEC is clearly cracking down on crypto, especially with Coinbase also facing charges, BlackRock has listed it as a Bitcoin custodian. The unusual timing of the application and some ambiguities in the application seem to suggest that BlackRock has meticulously planned and found a path and strategy for success.

Although the average processing time for SEC applications is a lengthy 200 days, the excitement in the crypto community about the potential birth of the first spot Bitcoin ETF in the U.S. has reached a peak. A senior ETF analyst at Bloomberg stated, "I would bet on BlackRock; I believe it will be approved by the end of this year."

An obvious expectation is whether BlackRock, as an important creator and promoter of the gold market, can replicate its past success and push Bitcoin into a more universal world.

In 2003, the world's first gold ETF was born, and in 2004, State Street Global collaborated with the World Gold Trust Services, LLC to launch a gold ETF—the StreetTracks Gold Trust (NYSE: GLD), which is currently the largest gold ETF. When GLD was launched, investors could easily gain exposure to gold, which gradually sparked a surge in gold ETF subscriptions, leading to a continuous rise in gold prices. ReflexivityRes co-founder @WClementeIII stated that if BlackRock's Bitcoin exchange-traded fund (which has 99% ETF certification) is launched (very similar to the structure of GLD), allowing the public to easily gain exposure to Bitcoin, similar price behavior is expected.

Moreover, the first Bitcoin spot ETF is being launched by BlackRock. If the launch of GLD opened up the gold trading market, then BlackRock will take the gold market to another level of prosperity. Venture capital firm CEHV partner @adamscochran shared that "people do not realize that BlackRock really created the gold market as we know it today." Before BlackRock launched the gold ETF in 2009, the gold market was a $1 trillion market, and now it is a $13 trillion market. BlackRock's most famous brand, "iShares," offers 3 of the top 5 largest gold ETFs in the world.

@adamscochran attributes this to the ground troops that BlackRock has assembled worldwide, which traded the gold market under the baby boomer dividend, transforming gold from primarily being used for jewelry and technology materials into an investment use. This push has increased investment demand to nearly 25%, leading to a second-order effect of increased purchases of gold by central banks.

Therefore, 20 years later, BlackRock's application for a Bitcoin spot ETF is seen as akin to promoting the development of gold ETFs back then. @adamscochran stated, "BlackRock will arm advisors and educate a large number of consumers to allocate X% of their portfolios to cryptocurrencies, thoroughly promoting this narrative." As the world's largest asset management company, BlackRock manages nearly $10 trillion in assets.

Traditional Financial Giants Queue Up, Raising Concerns

An undeniable trend is that traditional financial giants looking to stake a claim in Bitcoin spot ETFs may not be limited to BlackRock.

After BlackRock submitted its application for a Bitcoin spot ETF to the SEC, Andrew Parish, co-founder of hedge fund tool provider Arch Public, stated that Fidelity, the world's third-largest asset management company, may be considering acquiring Grayscale and applying for a Bitcoin spot ETF. Meanwhile, asset management company WisdomTree submitted another spot Bitcoin ETF application on June 20, seeking approval to launch the WisdomTree Bitcoin Trust.

If BlackRock's application is approved, Wall Street may flood into the market. ReflexivityRes co-founder @WClementeIII stated, "This could mean the expulsion of crypto-native companies and the introduction of large traditional companies allied with the U.S. government, attempting to control Bitcoin and cryptocurrencies." Noted crypto blogger @scottmelker has long predicted, "Since the collapse of FTX, Wall Street will make a big push into this space, and regulators may choose them over our existing crypto platforms." More specifically, the detailed explanation in BlackRock's application document about how Bitcoin can choose which network to fork raises suspicions of an intention to control Bitcoin.

Recently, traditional financial giants have also been active in the crypto space. In addition to applying for a Bitcoin spot ETF, the digital asset market EDX Markets, supported by Citadel Securities, Fidelity Investments, and Charles Schwab, has officially launched trading services, seemingly confirming this point. Dawn Fitzpatrick, CEO of Soros Fund Management, stated at the Bloomberg Investment Summit that the time has come for traditional finance (TradFi) to acquire crypto technology.

Whether BlackRock's Bitcoin spot ETF can pass remains uncertain, and whether its approval will bring tremendous momentum to crypto or lead to a crackdown is unknown, but it is bound to be a crucial landmark event in the development of crypto.