Bitcoin ETF: almost there, but efficacy must be proven to the SEC

Former chairman of the US Securities and Exchange Commission (SEC), Jay Clayton, said the Bitcoin ETF has a strong chance of being approved if applicants can prove its efficiency and effectiveness as an investment vehicle for digital assets. 

However, Clayton refrained from speculating on when, or if, such an ETF will be approved.

We are close to SEC approval of a Bitcoin ETF

During an appearance on CNBC, Clayton stated: 

“If it is true that the spot market has similar effectiveness to the futures market, it would be difficult to resist the approval of an ETF on Bitcoin.”

This statement suggests that if the Bitcoin spot market has investor protections and oversight measures similar to the futures market, it would be difficult for the SEC to reject a proposed ETF.

Clayton, who chaired the SEC during the rejection of several applications for spot Bitcoin ETFs, currently works as a senior policy adviser at the law firm Sullivan & Cromwell. 

He pointed out that lack of transparency and concerns about investor protection in the unregulated spot market were the reasons behind previous rejections.

To illustrate the SEC’s approach, Clayton compared the approval of futures-based ETFs in the past. 

He noted that the SEC approved futures-based ETFs after evaluating the oversight and investor protections present in the futures market, while similar safeguards were not perceived in the spot market.

The long odyssey for approval of a Bitcoin ETF

Recently, investment giant BlackRock submitted an application for a spot Bitcoin ETF, raising hopes that approval is imminent. BlackRock has a strong track record of ETF approvals. 

ETFs proposed by BlackRock and others suggest using Coinbase as a partner to improve market surveillance and provide trading and clearing information, with the goal of increasing transparency in the pseudonymous market. 

Notably, the SEC is currently suing Coinbase for alleged violations of US securities laws.

In another lawsuit, digital asset investment firm Grayscale has filed suit against the SEC for rejecting its application for spot Bitcoin ETFs. 

These legal battles highlight the challenges faced by companies seeking approval for a Bitcoin ETF and the importance of addressing regulatory concerns.

Legislation granting greater authority to the Commodity Futures Trading Commission (CFTC) in directly regulating the spot market for Bitcoin and other digital assets stalled last year due to the failure of FTX and litigation involving Sam Bankman-Fried. 

However, the new legislation granting powers to the CFTC could reassure regulators considering the approval of an ETF by addressing their concerns.

Although the path to approval of a spot Bitcoin ETF remains uncertain, Clayton’s comments indicate that demonstrating the efficiency and effectiveness of such an investment vehicle could significantly increase the likelihood of the SEC’s approval. 

As the cryptocurrency industry continues to evolve, market participants and regulators are working to strike a balance between innovation and investor protection, paving the way for potential ETF opportunities in the future.

GrayScale protests with direct letter to Security and Exchange Commision

In a recent development, digital asset investment firm Grayscale sent a letter to a judge expressing its protest against the approval of a 2x Bitcoin leveraged exchange-traded fund (ETF) by the US Securities and Exchange Commission (SEC), while similar approval was not granted for a spot Bitcoin ETF.

Grayscale’s letter raises a valid question about the regulatory disparity between these two types of investment products.

Grayscale argues that the approval of a 2x leveraged Bitcoin ETF implies that the SEC recognized market demand and investor interest in obtaining leveraged exposure to Bitcoin. 

However, it questions why the same recognition was not extended to a spot Bitcoin ETF, which would provide investors with direct exposure to the underlying asset without any leverage.

The complaint highlights the inconsistency of the SEC’s approach and questions the logic behind approving one type of investment product and rejecting another that serves a similar purpose. 

Grayscale argues that the SEC’s reluctance to approve a spot Bitcoin ETF hinders investors’ access to a regulated and transparent vehicle for investing in the digital asset.

Grayscale is not alone in expressing frustration: numerous industry participants and investors have expressed disappointment with the SEC’s stance on spot Bitcoin ETFs. 

They argue that a regulated spot Bitcoin ETF would provide investors with an easier and more transparent way to access the cryptocurrency market, aligning with the SEC’s goal of protecting investors.

Grayscale’s letter stresses the need for regulatory clarity and consistency in the cryptocurrency industry. 

It calls for a fair evaluation of proposed Bitcoin ETFs, highlighting the potential benefits such an investment vehicle could offer, including increased market liquidity, enhanced investor protection, and greater market stability.