Spot Bitcoin ETF could still face significant hurdles, experts say

It was never going to be this simple. 

Bitcoin’s price shot up nearly 25% in the two weeks following the news that investment giant BlackRock submitted an application with the Securities and Exchange Commission to offer a bitcoin spot exchange-traded fund. BlackRock has a sterling record with ETF applications and ETFs tend to make it easier for retail investors to access underlying assets, potentially pumping millions or billions more into various markets.

Bitcoin holders and investors saw the influential firm’s entrance into the historically crowded field of bitcoin spot ETF seekers as the chance for Charlie Brown to finally kick a football that's been teed up for years.

But news first reported by the Wall Street Journal, that the SEC wants BlackRock and other recent applicants, including Nasdaq, Cboe and Fidelity, to revise and resubmit those applications didn’t surprise industry experts. 

A spokesperson for the SEC declined to comment “on potential filings.” A Cboe spokesperson said it plans to update their filing and resubmit it to the SEC. Nasdaq, BlackRock and Fidelity declined to comment. 

So you're saying there's a chance...

“The notion of a spot bitcoin ETF is very emotionally charged for some people, but it’s not unusual for the SEC to send applications back and ask for clarifications,” said Sean Tuffy, a financial regulatory expert. 

Vivian Fang, a finance professor at Indiana University, sees the SEC’s move asking applicants to make changes to their applications as a step forward in the approval of a spot bitcoin ETF. 

BlackRock, for example, will change the language and then work to quickly resubmit, though the SEC could still ask for more clarity, Fang said. 

“I see this as very encouraging news as the SEC did not just go ahead and turn it down,” Fang said. “It basically kicked it back and said, work on the application and there is a chance that this may get approved.”

The SEC too likely wants “reputable” exchanges and asset managers involved with a spot bitcoin ETF, Fang added. 

That may exclude existing crypto trading platforms, as none are registered as national securities exchanges, and most have listed assets that the SEC considers to be unregistered securities, likely complicating their ability to apply for that status. 

Commingling of operations an issue

Financial regulators including the SEC have also raised concerns that the way most if not all are structured, with normally separate functions like exchange and broker-dealer services, and sometimes proprietary trading, under the same roof. Allegations of crypto trading platform providers betting against their own customers are one example of what concerns regulators about the combination of those functions, and regulators in the U.S. and elsewhere highlighted it as a major concern, even prior to the collapse of trading giant FTX. 

"In other parts of our securities markets, the exchange, broker-dealer, and clearing functions are separate,” SEC Chair Gary Gensler said in a speech earlier this month. “Separation of these core functions helps mitigate the conflicts that can arise with the commingling of such services.”

Splitting those services might also help assuage the SEC’s longstanding hangup with bitcoin spot ETF applications: that the underlying market is opaque and prone to possible manipulation. The agency accuses Binance of market manipulation in its enforcement action against the crypto trading giant.

Despite regulatory scrutiny of crypto trading firms, Cboe submitted updated applications late on Friday from Invesco, VanEck, WisdomTree, and Wise Origin to list Coinbase as the trading platform they would use for their surveillance-sharing agreements.

That's 'TradFi's' music

Tuffy saw this regulatory skepticism towards existing crypto trading platforms as an issue for ETF applications moving forward. Even putting aside the SEC’s recent enforcement action against Coinbase over the agency’s belief that Coinbase listed unregistered securities, among other violations the agency alleges, Coinbase isn’t registered as a national securities exchange, so they likely could not be used for the spot market surveillance sharing agreement central to the new applications. 

The lack of compliance in the digital asset industry may clear the path for traditional financial giants to step into the void and provide that service, potentially leaving established crypto trading firms behind.

“If you have BlackRock co-sharing the monitoring duties with Nasdaq, it is a golden team, you can’t really beat that,” Fang said. 

Tuffy also saw it as an opportunity for traditional financial institutions to step into a bigger role in crypto markets, seeing it as a possibility that Nasdaq accelerates their offering in reaction to the SEC’s guidance. 

“I think overall it’s in-line with the SEC’s skepticism over the bitcoin ETF. But if you’re in the crypto world it’s sort of hopeful, because they didn’t outright reject it, they just asked for clarification,” said Tuffy. 

But he added a dose of cold water.

“Ultimately I think that as long as Gary Gensler is in charge I don’t think we’re going to get a bitcoin ETF through, so I am skeptical about the outcome,” he said.

UPDATE: With news of Cboe's revised ETF submissions on behalf of Invesco, VanEck, WisdomTree, and Wise Origin.