After years of rejection, asset management titan BlackRock is taking another shot at getting regulatory approval for a spot bitcoin exchange-traded fund (ETF). The firm submitted its proposal to the Securities and Exchange Commission (SEC) on June 15th, 2022.
BlackRock’s filing has revived hopes that a spot bitcoin ETF could finally become a reality. Other major financial players like Fidelity and Invesco have resubmitted their spot bitcoin ETF proposals. But what exactly is BlackRock proposing, learn more here and know why might it succeed where others have failed.
Understanding Spot Bitcoin ETFs
The key difference lies between a spot bitcoin ETF versus the current futures and equity-based crypto ETFs. A spot bitcoin ETF would track the current price, allowing investors to gain direct exposure to the cryptocurrency.
By contrast, existing bitcoin futures ETFs trade contracts that speculate on future bitcoin prices. Crypto equity ETFs invest in blockchain and crypto companies stocks rather than bitcoin.
Surveillance Sharing Agreements
The SEC has repeatedly voiced doubts over the maturity of cryptocurrency spot markets, especially around vulnerabilities to manipulation and fraudulent behavior. BlackRock looks to ease these concerns by proposing a surveillance-sharing agreement between its spot bitcoin ETF and regulated crypto exchanges.
Such an arrangement would enable close monitoring of all trading activity, arming regulators with transparency into transactions, volumes, bid-ask spreads, order book changes and other metrics. Detecting abnormal patterns could help exchanges identify potential misconduct and take precautions while providing regulators the visibility they lack.
Implementing robust surveillance transcending fragmented spot exchanges would be a significant step forward. It demonstrates a reasonable faith effort from industry players to self-police markets of heightened SEC interest. The additional oversight this facilitates could finally make regulators feel confident enough to permit direct, daily retail access to cryptocurrencies through ETF vehicles.
Learning From Past Mistakes
BlackRock devotes attention to addressing regulatory concerns raised in recent SEC actions against major crypto firms. Specifically, the ETF proposal outlines custodial policies to prevent the misuse of customer assets, avoiding pitfalls that led to FTX’s downfall.
It also explains how the fund would comply with SEC guidance on limiting US investor access to unregulated exchanges like Binance. Stressing diligent oversight and adherence to compliance requirements in these areas is likely an attempt to reassure skeptical regulators.
Additionally, BlackRock distinguishes its ETF from existing investment vehicles like the Grayscale Bitcoin Trust, which trades at heavy discounts compared to the value of its underlying assets. This disconnect occurs partly due to insufficient redemption mechanisms and arbitrage opportunities.
BlackRock has likely consulted with market makers to design a creation/redemption process that supports efficient secondary market trading. This would enable its fund to avoid the distortionary effects experienced by-products like GBTC.
Building the Ecosystem
BlackRock’s spot bitcoin ETF bid is seen as a potential inflection point after years of rejection. As the world’s largest asset manager running a dominant ETF franchise, BlackRock lends unparalleled credibility that could sway the wary SEC. Its expertise in navigating complex fund structures and managing scrutinized asset classes helps position this latest attempt as the most viable.
Moreover, BlackRock now has reinforcements from major financial allies. Fellow heavyweights like Fidelity, Invesco and WisdomTree are rallying behind complementary spot bitcoin ETF filings. Together, they present a united front to tackle the SEC’s lingering concerns through strengthened surveillance, custody controls and arbitrage mechanisms.
Further strengthening confidence are infrastructure enhancements underway across the broader crypto ecosystem. The newly launched EDX digital asset exchange, backed by Charles Schwab and Citadel, aims to bring institutional-grade integrity and oversight to spot markets. Such platforms could help mature trading venues and regulators must be more confident.
Cautious Optimism for Investors
While confidence is higher than ever, nothing is guaranteed regarding the SEC approving a spot bitcoin ETF. The proposals put forth certainly tackle many regulatory concerns. But questions around market maturity and manipulation risks still loom.
Nonetheless, BlackRock’s filing, coupled with a coordinated industry response, represents real progress. There appears to be a strengthening alignment between crypto developers and financial incumbents on building ETF-grade products.
So investors should keep an eye on these developments with a dose of optimism. If approved, spot bitcoin ETFs could significantly expand mainstream access to crypto. And that would unleash a torrent of new capital into digital asset markets.
