(Bloomberg Businessweek) -- It’s been a brutal stretch for crypto. Almost $2 trillion of market value in cryptocurrencies has been wiped away since the market peak in late 2021. Major digital asset companies have collapsed amid allegations of fraud and market manipulation. US regulators are cracking down on many of the businesses still standing. But one corner of the market is suddenly garnering enthusiasm: Bitcoin exchange-traded funds.
Some of the biggest and most established names on Wall Street are filing or refiling applications with the US Securities and Exchange Commission in an attempt to be the first to release such a product. A Bitcoin ETF would invest in the cryptocurrency on behalf of its shareholders. In other words, investors could easily get direct exposure to crypto by going to their brokerage and buying shares the way they would a stock.
BlackRock Inc., the world’s largest money manager, applied for a Bitcoin ETF in mid-June, setting off a frenzy of filings from the likes of Fidelity Investments, Invesco and WisdomTree. The Nasdaq and Cboe Global Markets exchange operators, which filed applications on behalf of BlackRock and Fidelity, respectively, have since resubmitted the paperwork after the SEC said the initial filings were insufficient and lacked certain information.
Pushback from the SEC is nothing new. Various fund companies have been trying for years to get crypto ETFs approved in the US, and they’ve consistently been rejected. So why the flurry of applications now, at a time when crypto has lost much of its former buzz?
The timing coincides with a closely watched lawsuit brought in federal court by Grayscale Investments LLC against the SEC. The company runs the publicly traded Grayscale Bitcoin Trust, which holds Bitcoin the way a fund would but doesn’t have the ETF structure that allows it to keep its share price in line with the token’s price. It currently trades for about 28% less than the value of the Bitcoin it owns. Grayscale wants to be allowed to convert the trust to an ETF and is disputing the SEC’s reasoning in rejecting its application. A decision is expected as soon as this month.
Oral arguments in the case in March sparked speculation that the court could clear the way for an ETF. Judges on an appellate panel in Washington grilled the SEC on its stance that Bitcoin ETFs shouldn’t be allowed because Bitcoin is more susceptible to fraud and manipulation than Bitcoin futures contracts. The SEC has already approved ETFs that invest in Bitcoin futures, which have been trading on the Chicago Mercantile Exchange since 2017. The judges questioned why the futures market and the direct spot market for Bitcoin would be so different when both rely on the same underlying asset pricing.
“The industry sees the court case moving forward, and they realize there’s a nonzero probability that, like it or not, the SEC will be forced to allow a spot Bitcoin ETF,” says James Angel, an associate finance professor at Georgetown University, who signed on to one of the amicus briefs in support of Grayscale. “When a spot Bitcoin ETF is approved, there’s going to be a competitive scramble to be the winner, and everybody is lining up at the starting gate, just waiting for the starting gun to go off.”
Following the arguments, Bloomberg Intelligence analysts, who had predicted the SEC would prevail, adjusted their outlook to give Grayscale a 70% chance of winning. They also said that the wording of the ruling would be key. The court could tell the regulator to revisit its reasoning, giving it an opening to deny Grayscale’s application on different grounds. The SEC could also appeal a decision in Grayscale’s favor, further delaying any approval.
A Bitcoin ETF would not only open the door for more retail investors to trade crypto, it could also offer a more appealing avenue for wealth advisers investing on behalf of their clients or institutional participants; they’d be more comfortable placing money into a product with which they’re familiar. Exchange-traded funds are a huge business. BlackRock managed about $3 trillion in client assets in ETFs at the end of March, invested in an array of assets including stocks, bonds and commodities. Salim Ramji, global head of BlackRock’s ETF and index investing business, told Bloomberg Television that the company’s interest in crypto is a logical extension of its model: “How do we help investors gain access to parts of the market that had otherwise been more difficult or really expensive or opaque?”
Chief Executive Officer Larry Fink seems to have had a turnaround on Bitcoin. About six years ago, he said cryptocurrencies were a proxy for how much money laundering was in the world. But he recently told Fox Business that Bitcoin is an “international asset” akin to “digitizing gold.”
Over the past year, BlackRock has expanded into crypto, working with Coinbase Global Inc. to make it easier for institutional investors to manage and trade Bitcoin and setting up a private Bitcoin trust. According to filings, Coinbase would be in charge of safekeeping the Bitcoin in the BlackRock ETF and helping to keep tabs on market integrity. Coinbase is the largest US crypto exchange, which gives it visibility into American trading activity. But it’s also been a target of regulators. In June the SEC sued Coinbase for listing tokens the agency considers unregistered securities. Coinbase says nothing it lists meets the definition of a security and is fighting the suit.
A Fidelity representative says “a meaningful portion” of its customers already own or are interested in crypto. The company found in a survey last year that a Bitcoin ETF is the most appealing idea in the US for a new digital asset product, and that more than three-quarters of high-net-worth investors, family offices and financial advisers want to buy digital assets.
But some things many institutional investors have said they like about crypto—such as diversification and inflation hedging—are looking shakier these days. Bitcoin prices tumbled last year right along with tech stocks and the broader market, amid the highest inflation seen in decades. Cryptocurrencies are volatile: Bitcoin skyrocketed 305% in 2020 and 60% in 2021 before plunging 64% in 2022. In recent remarks to reporters in the wake of the applications, SEC Chair Gary Gensler said investors in crypto couldn’t be as confident in the fairness and integrity of the market as they could be with US stocks.
Crypto remains largely unregulated, as investors learned when a string of high-profile companies imploded last year, costing some their life savings while setting off a contagion in crypto markets. “It’s an incredible danger for consumers,” says John Reed Stark, a former SEC enforcement attorney who now runs his own consulting company. “Whenever these entities like Fidelity and others start transacting in crypto, it just adds a level of legitimacy that is not warranted because the space is so rife with manipulation and fraud.”
For now, the finance industry’s heavy hitters are waiting on judges and the SEC to rule on whether the ETFs can go forward. The process could take months. But Bitcoin traders appear to like the odds and are welcoming Wall Street’s advances: The price has jumped more than 20% since the day before BlackRock’s filing.
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