Bitcoin spot ETFs, Congress nudges the SEC

Two members of the US Congress have written to SEC Chairman Gary Gensler calling for the approval of Bitcoin spot-based ETFs. 

ETFs on Bitcoin Spot, the SEC’s nonsense

These are Tom Emmer and Darren Soto, who wanted to highlight the contradictions of the government agency with respect to the approval of Bitcoin ETFs.

In their letter, they trace the SEC’s attitude towards Bitcoin, recalling how the Securities and Exchange Commission has always been concerned about the risks associated with Bitcoin. 

The text starts with the recent approval of ETFs based on Bitcoin Futures, it says: 

“While this is a step forward for millions of Americans who are demanding access to simple ways to invest in Bitcoin, these products are potentially much more volatile than a Bitcoin spot ETF and may impose substantially higher fees on investors due the premium at which Bitcoin futures typically trade, as well as the cost of rolling futures contracts each month”.

According to the two MPs, ETFs on spot Bitcoin are even safer than those based on futures:

“We question why, if you are comfortable allowing trading in an ETF based on derivatives contracts, you are not equally or more comfortable allowing trading to commence in ETFs based on spot Bitcoin. Bitcoin spot ETFs are based directly on the asset, which inherently provides more protection for investors”. 

Bitcoin ETFs compared

Their reasoning is that the SEC requires two things in order to approve Bitcoin ETFs: 

• that the market proves resistant to fraud and manipulation;
• that the main market be regulated.

Now, the ETFs approved so far are based on Bitcoin futures traded at the CME, which in turn takes Bitcoin from exchanges such as Coinbase, Kraken and Bitstamp. So, if the SEC were concerned about the fact that Bitcoin markets are unregulated, then it should also be concerned about the CME’s activities on Bitcoin, which are based on those very markets. 

But since the SEC seems to have no problem with this, it might as well allow trading also of ETFs based on direct Bitcoin and not derivatives that in turn are based on spot Bitcoin. 

Moreover, they note that before Bitcoin ETFs were approved, other investment products were launched on the market. Companies that did so were duly registered. So why not allow the same thing with ETFs? A case in point is the Grayscale Bitcoin Trust, an investment product that relies precisely on spot Bitcoin and has at least 630,000 subscribers. 

This reasoning makes the SEC’s position unclear. 

Finally, Tom Emmer and Darren Soto conclude: 

“We do not intend to say that one method of exposure is better than the other, but rather that unless there are clear and demonstrable investor protection advantages, investors should have a choice over which product is most suitable for them and their investment objectives”.

The SEC’s openings and closures on Bitcoin ETFs

The approval of Bitcoin ETFs has been long overdue. The first fund, that of ProShares, was launched on October 19, dragging the price of Bitcoin to new records. Other ETFs have been launched, but those who believed in an opening by the Securities and Exchange Commission had to think again. 

The SEC is currently only “lenient” on Bitcoin Futures-based ETFs, and has already rejected applications for leveraged Bitcoin Futures-based ETFs and Futures-based ETFs that short the price of Bitcoin (i.e. predict a price drop). Essentially, the SEC seems to be putting the brakes on these derivative instruments, but it also remains sceptical about Bitcoin in its own right.

Even if, as they note, there is little difference with respect to the risks, as Bitcoin spot markets are connected with Futures, which entails the same dangers. All that remains is to wait for clarification from Chairman Gary Gensler and who knows, maybe this could lead to new developments.