The Journey Toward Bitcoin ETF Approval
After 8 years of relentless effort, the development of Bitcoin ETFs has not slowed despite the SEC's cautious approach. Instead, institutions are enhancing industry transparency and compliance to secure the launch of the first Bitcoin ETF. A significant milestone was achieved in February 2021 when Canada's Purpose Investments successfully listed a Bitcoin ETF on the Toronto Stock Exchange, igniting hope for broader adoption.
Historical Attempts at U.S. Bitcoin ETF Approval
John Hyland, an ETF investment expert who collaborated with Bitwise Investments on early Bitcoin ETF applications, attributes pre-2019 failures to "fatal flaws in application documents." Key issues included:
- Self-Custody Risks: Proposals like Winklevoss and VanEck involved holding Bitcoin directly, raising security concerns.
- Pricing Mechanisms: Winklevoss relied on a single, self-owned exchange (3% of global volume), while VanEck used OTC quotes, both deemed inadequate by the SEC.
The SEC consistently rejects products with design flaws or insufficient risk disclosures.
Current U.S. Cryptocurrency ETF Landscape
As of now, 11 ETFs await SEC approval (S-1 forms), with six having accompanying exchange applications (19B-4 forms). Key details:
| Exchange | Applications Submitted |
|---|---|
| Cboe BZX | 4 |
| NYSE Arca | 2 |
The SEC has 45–240 days to respond post-submission. VanEck Bitcoin Trust, the earliest applicant, entered review on March 19, 2021, with decisions deferred twice to gather public input. A final verdict is expected by November 14, setting a precedent for pending applications.
Bitcoin Spot ETFs vs. Bitcoin Futures ETFs
Spot-Based ETFs
- Structure: Directly holds Bitcoin via third-party custodians.
- Advantages: Tracks Bitcoin price more accurately; lower risk.
- Disadvantages: Limited to end-of-day trading.
Futures-Based ETFs
- Structure: Invests in Bitcoin futures contracts and cash equivalents.
Advantages:
- Leverages CFTC-regulated derivatives.
- Enables 24/7 trading, enhancing liquidity.
- Disadvantages: Higher risk due to rollover costs, leverage, and tracking errors.
👉 Explore the future of Bitcoin ETFs
Regulatory Challenges and SEC Concerns
The SEC has repeatedly denied Bitcoin ETF applications since 2017, citing:
- Market Manipulation: Bitcoin's price susceptibility to unregulated exchange activities.
- Lack of Transparency: Insufficient safeguards against fraud and liquidity crunches.
- Jurisdictional Gaps: Neither SEC nor CFTC fully oversees cryptocurrency exchanges.
However, proponents argue that Bitcoin's market maturity and futures listings under CFTC oversight mitigate these risks. SEC Chair Gary Gensler’s crypto expertise may also pave the way for nuanced regulations.
FAQs
Q: Why has the SEC delayed Bitcoin ETF approvals?
A: Concerns over market manipulation, custody risks, and regulatory gaps persist.
Q: What distinguishes spot ETFs from futures ETFs?
A: Spot ETFs hold actual Bitcoin, while futures ETFs track derivative contracts, offering different risk/reward profiles.
Q: Could 2023 see the first U.S. Bitcoin ETF?
A: VanEck’s November 14 deadline is a critical indicator, though broader regulatory clarity is needed.