What does the approval of Bitcoin spot ETF for sale mean?

Author: Xiao Za Lawyer

On January 10, 2024, local time, the U.S. Securities and Exchange Commission (hereinafter referred to as "SEC") approved the first batch of ETFs (Exchange Traded Funds) that partially use the cryptocurrency Bitcoin as underlying assets in history, allowing these ETFs to officially list and trade publicly on Thursday.

It must be said that Bitcoin has surged significantly since the end of 2023, partly due to the anticipation and optimism of the entire cryptocurrency market and capital markets regarding the SEC's approval of ETFs. Today, the Xiao Za team will analyze the future regulatory trends of the cryptocurrency market in light of this milestone event in the history of cryptocurrency assets.

Why Did the SEC Compromise on Bitcoin ETFs?

According to the public list, the 11 ETFs approved this time are: Grayscale, Bitwise, Hashdex, iShares, Valkyrie, Ark 21Shares, Invesco Galaxy, VanEck, WisdomTree, Fidelity, and Franklin, all of which are significant players, including well-known investment institutions such as Invesco, Fidelity, and global asset management giant BlackRock, as well as newcomers like Grayscale and Ark. It is evident that as the cryptocurrency market gradually matures and public awareness of virtual assets increases, it has become an object of importance to the traditional capital market.

The approval of Bitcoin ETFs marks a milestone in the mutual engagement of traditional finance and cryptocurrency, and it holds significant meaning for virtual currencies: it signifies that Bitcoin, as a product challenging traditional financial order and rules, has won the "compromise" of regulatory agencies for the first time, and this compromise, once achieved, will lead to countless more.

In fact, the SEC's compromise was not easy. Previously, Grayscale Investments had applied to the SEC to convert its Grayscale Bitcoin Trust (GBTC) into an ETF, which was rejected by the SEC. Grayscale argued that this decision did not comply with U.S. securities laws and took the case all the way to the federal appeals court. Ultimately, the judge ruled that the SEC's rejection of Grayscale's application lacked sufficient justification, which led to a shift in the SEC's stance on reviewing Bitcoin ETFs, resulting in the approval of the first batch of Bitcoin ETF applications.

What Does the Listing of Bitcoin ETFs Mean for the Cryptocurrency Market?

Some partners believe that the listing of Bitcoin ETFs seems to indicate that regulatory agencies are beginning to "soften" their stance on many cryptocurrency assets, including virtual currencies. Some even view this event as a "game changer" for cryptocurrencies, believing that the crypto world has begun to win the tug-of-war with traditional financial regulation, and that subsequent crypto-native products like RWA and DAO, which align more closely with existing legal and regulatory frameworks, could also achieve "compliance" like Bitcoin ETFs.

However, the Xiao Za team believes that the approval of Bitcoin ETFs is just the beginning and does not mean that the crypto world will achieve breakthrough progress in a short time (or even in the coming years), based on the following reasons:

(1) ETFs are merely financial instruments and do not change the nature of cryptocurrencies

As a type of exchange-traded fund, ETFs are essentially financial instruments or investment tools that create a portfolio of securities based on the performance of a specific index, allowing investors to trade a basket of securities by purchasing just one financial product. Generally speaking, ETFs have three main characteristics: first, they can be freely bought and sold like stocks; second, they track specific securities indices; and third, they allow for physical and cash redemptions at any time.

Therefore, a Bitcoin ETF is not equivalent to Bitcoin itself, nor will it affect the nature of Bitcoin. It can essentially be viewed as a derivative product of Bitcoin, with a connection between the two but fundamentally different. Currently, countries around the world generally regard Bitcoin and other cryptocurrencies as a special type of financial product or virtual asset, and have gradually introduced regulatory frameworks for Bitcoin. The approval of Bitcoin ETFs does not affect existing regulations on the direct holding, use, and trading of cryptocurrencies.

(2) ETFs cannot effectively regulate the risks of cryptocurrency investments

As mentioned earlier, the influence and relationship between ETFs and cryptocurrencies are one-way; ETFs cannot inversely affect cryptocurrencies, and thus cannot effectively regulate the risks associated with cryptocurrencies. In other words, as long as the value foundation of cryptocurrencies like Bitcoin and Ethereum is "based on the consensus of participants in the crypto world," then many virtual currencies will rise and fall as they should. ETFs can only follow suit and cannot change the fact that cryptocurrencies are highly risky investment objects.

(3) Bitcoin has unique characteristics that cannot be replaced by other cryptocurrencies

As the "progenitor" of cryptocurrency assets created based on blockchain technology, Bitcoin holds a special "status" and value foundation that distinguishes it from other virtual currencies. The liquidity and value of most cryptocurrency assets largely depend on the consensus of participants and communities, while Bitcoin occupies an exceptionally unique position in the minds of most participants in the crypto world. Even among ordinary people outside the circle, Bitcoin is often equated with the broader concepts of "cryptocurrency" and "crypto assets," indicating its high recognition.

For this reason, in the regulatory frameworks of various countries regarding cryptocurrencies, Bitcoin holds a special status. For example, in the EU's regulatory framework for crypto assets and regulations concerning ICO activities, while Bitcoin is not recognized as "legal tender," it is acknowledged as a virtual currency that can be exchanged for fiat currency and can be used to obtain goods and services in the real economy, thus possessing value.

Therefore, Bitcoin has unique characteristics that other cryptocurrencies cannot replicate, making it very difficult for other crypto assets to issue ETFs compared to Bitcoin. Currently, ETH seems to be the most likely candidate to have an ETF as a Bitcoin underlying asset, while other types of cryptocurrencies face significant challenges.

What Does the Bitcoin ETF Mean for Ordinary People?

A question many people are concerned about is whether residents of mainland China can purchase the Bitcoin ETF if it is publicly listed for trading. Does buying and selling Bitcoin ETFs violate China's laws and regulations regarding cryptocurrency assets?

The Xiao Za team believes that whether Bitcoin ETFs, as a derivative of cryptocurrency assets, fall within the regulatory scope of the People's Bank of China, the Cyberspace Administration of China, the Supreme People's Court, and the "Notice on Further Preventing and Dealing with Risks of Virtual Currency Trading and Speculation" (hereinafter referred to as the "9.24 Notice") is a matter of debate. However, based on the first article, third item of the 9.24 Notice, which states, "Providing services to residents of our country through overseas virtual currency exchanges via the internet is also considered illegal financial activity. Those working for relevant overseas virtual currency exchanges in our country, as well as legal entities, non-legal entities, and individuals who knowingly or should know that they are engaging in virtual currency-related businesses and still provide marketing, payment settlement, technical support, and other services for them will be held legally accountable," U.S. Bitcoin ETF dealers cannot sell related financial products to Chinese citizens, and residents of mainland China are also prohibited from directly purchasing related financial products using VPNs or other tools.

However, can residents of mainland China buy and sell U.S. Bitcoin ETFs if they physically go abroad? First, there are no restrictions on investors for the issuance of U.S. Bitcoin ETFs; anyone can invest in Bitcoin ETFs as long as they comply with U.S. laws. However, related investments face compliance checks regarding capital inflow and outflow. The Xiao Za team particularly advises readers to exercise caution regarding such investments. In Hong Kong, the Hong Kong Securities and Futures Commission has clearly stated that the issuance of related crypto assets must comply with the regulations of various countries and jurisdictions, meaning that Chinese citizens cannot purchase crypto asset ETFs issued in Hong Kong (in the future).

In Conclusion

Bitcoin ETFs represent an organic combination of new and old entities. We cannot make any predictions about the future development of this investment product at this time, but since Grayscale obtained a favorable ruling from the federal appeals court, Bitcoin has begun to rise. The approval of Bitcoin ETFs is indeed a shot in the arm for the crypto market against the backdrop of economic downturns, but the fact that cryptocurrencies have not yet entered the mainstream remains unchanged. The Xiao Za team advises partners to maintain a clear mind at all times and not to make hasty investment decisions.