Speculation is mounting that BlackRock may be in sight of ending a decade-long embargo on spot bitcoin exchange traded products in the US.
Dozens of asset managers have applied to launch such a fund in the world’s largest investment market since the Winklevoss twins, the entrepreneurs and Olympic rowers, made the first filing in 2013, when bitcoin was trading at about $1,000.
However, the regulator, the Securities and Exchange Commission, has repeatedly rejected the applications, citing the risk of fraud and manipulation in the market for “spot” bitcoin, which takes place on unregulated exchanges. Instead, it has only been willing to approve ETFs based on bitcoin futures contracts, which are listed on the Chicago Mercantile Exchange, a regulated venue. It has even approved a two-times- leveraged futures ETF that launched on June 27.
Some believe BlackRock, the world’s largest asset manager, might succeed where others have failed.
Investors are even speculating on that outcome — the price of bitcoin has rallied 22 per cent since the filing on June 15 to a one-year high of $30,600 in expectation that a green light for BlackRock could unleash a wave of buying.
Likewise, the discount to net asset value of the $18.9bn Grayscale Bitcoin Trust (GBTC), the world’s largest crypto fund, has narrowed sharply to a nine-month low of 31.3 per cent. Grayscale is suing the SEC for its refusal to allow it to convert GBTC into an ETF, a move that, if allowed, would presumably see the discount disappear.
Meanwhile, Invesco, WisdomTree, Bitwise and Valkyrie, which have all had applications for spot bitcoin ETF filings rejected, have now refiled in the hope that something may have changed.
“The BlackRock ETF is likely to be approved,” said Dave Weisberger, chief executive and co-founder of CoinRoutes, an algorithmic trading platform for the digital asset industry, whose pedigree in the ETF world stretches back to being one of the creators of Morgan Stanley’s Opals products — precursors of ETFs — in the 1990s.
Part of the optimism stems purely from the fact that this is BlackRock. According to Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, BlackRock has had 575 filings approved by the SEC, and only one rejection. He put the odds of approval on this occasion at 50-50.
BlackRock’s application is subtly different from those that have gone before, though, and those differences could potentially be enough to win approval.
The chief difference is that the Nasdaq exchange, where the iShares Bitcoin Trust would be listed, “is expecting to enter into a surveillance-sharing agreement with an operator of a United States-based spot trading platform for bitcoin”.
When the SEC rejected a bitcoin ETF filing by Bitwise last year it explicitly said that having a “comprehensive surveillance-sharing agreement with a regulated market of significant size” was one way for an applicant to meet its obligations to prevent fraud and manipulation in the underlying market for spot bitcoin.
This would enable information about trading, clearing and customer identification to be shared.
“If Nasdaq is able to enter into an agreement with an exchange such as Coinbase, that could theoretically clear a pathway towards approval since it would directly address the SEC’s main concern”, allowing regulators “to monitor for and pursue bad actors”, said Nate Geraci, president of the ETF Store, a financial adviser.
However, Bryan Armour, director of passive strategies research, North America, at Morningstar, felt BlackRock was only “edging closer to addressing [the SEC’s] concerns”.
While having a data-sharing and surveillance-sharing effort with a cryptocurrency exchange “is certainly better than having zero insight into the underlying market”, he argued that manipulation could still be occurring on other exchanges, which would influence the price of bitcoin.
While Coinbase, the proposed custodian for the fund, is widely expected to be the chosen exchange, Geraci suggested the recently launched EDX Markets exchange “could be the exact solution needed to get the SEC comfortable”, given it is modelled on Nasdaq and the New York Stock Exchange and backed by Fidelity Investments, Charles Schwab and Citadel Securities — if it can generate sufficient volume for the SEC to consider it as “significant size”.
Weisberger also highlighted BlackRock’s proposal to adopt a trust structure that is “virtually identical” to the SPDR Gold Shares (GLD) and the iShares Gold Trust (IAU) — which are known as ETFs but are technically exchange traded products — rather than the traditional ETF structure governed by the Investment Company Act of 1940.
BlackRock “has done it cleverly by structuring it the same way that GLD and IAU are structured. If it goes to court, the SEC is effectively arguing that there is some fundamental difference between gold, which is designated as a commodity, and bitcoin, which has been designated as a commodity,” said Weisberger, who noted that several of the groups refiling applications have also adopted a trust structure.
Indeed, between the relationship with Coinbase and proposed surveillance-sharing agreement, BlackRock has “pretty much undercut all the SEC’s arguments other than ‘meh, we don’t like bitcoin’, so I think they have a very reasonable chance,” Weisberger added.
Both BlackRock and the SEC declined to comment.
The SEC earlier this month sued Coinbase alleging it violated US securities law by failing to register as a broker, national securities exchange or clearing agency.
Paul Grewal, Coinbase’s chief legal officer and general counsel said: “The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance. The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual,”
Armour was unconvinced by the trust structure argument, but retained an open mind.
“I don’t see any reason to believe that the SEC would change their thinking on this [but] it just seems too left field that BlackRock has to know something that we do not,” he said.
BlackRock’s 575-to-1 record is “the only reason why we would expect it to be approved”, he added. “There is a reputational risk that comes with the filing. You feel that they wouldn’t do this if there wasn’t a reason.”
