ETPs for Bitcoin: A Revolutionary Phase or a Bridge to Conventional Finance?

crypto industry experienced a significant event on January 10, 2024. The U.S. Securities and Exchange Commission (SEC) granted approval for the trading and listing of various spot Bitcoin exchange-traded product (ETP) shares.

This decision has raised concerns about the SEC's changing stance on crypto assets. Is this a genuine shift in their views on crypto assets, or is it simply a strategic move to benefit traditional financial institutions?

It seems that by approving these specific ETPs, the SEC may be selectively granting advantages to established banks, potentially sidelining innovative startups. These startups have dedicated years to developing the industry, while traditional financial players may now reap the rewards. {showAds}

ETPs for Bitcoin

A Brief Background

The U.S. Securities and Exchange Commission (SEC) classifies the majority of crypto assets as investment contracts, subjecting them to U.S. securities laws. As a result, issuing these assets requires adhering to strict regulatory requirements, which can be a daunting task for both startups and established companies in the crypto industry. {showAds}

It is important to recognize that the crypto market is plagued with a large number of scammers, highlighting the need for the SEC to be more vigilant and stringent. However, it is also crucial to note that every new industry attracts individuals seeking to exploit its early stages for illegal profits.

This is not a new pattern; even the securities market, now well-regulated, took many years to establish strong regulations. It is common for emerging industries to undergo a lengthy process of developing regulations and oversight to balance innovation with the prevention and management of fraudulent activities.

Introducing ETF and ETP for Bitcoin

Bitcoin ETFs, as explained by Coindesk, are investment funds that are publicly traded and provide a way for investors to invest in Bitcoin without actually owning the cryptocurrency itself. This eliminates the need for investors to directly deal with crypto regulations. {showAds}

These ETFs are traded on traditional securities exchanges, and investors can purchase shares in a fund that holds Bitcoin. Although there have been multiple attempts to launch ETFs linked to cryptocurrency since 2014, the first US-based Bitcoin ETF (BITO) began trading on October 19, 2021. {showAds}

ProShares, a well-known ETF issuer, was given permission by the SEC to create this fund. Within its initial days, the fund saw a significant amount of trading activity, with over $1 billion in assets being attracted, as reported by BIS.

In 2024, the BITO saw its peak with assets exceeding $2 billion, according to a report by The Block.

In 2023, while the SEC gave the green light to some Bitcoin ETFs, it denied requests to include a spot Bitcoin exchange-traded product (ETP). The key distinction between the two is that the Bitcoin spot ETP directly invests in Bitcoins as its underlying asset, while Bitcoin futures ETFs invest in derivative contracts based on Bitcoin's prices.

A common question may arise - what sets apart the Bitcoin spot ETP from owning Bitcoin directly? 

At its core, the former is subject to regulations and is typically overseen by established financial institutions, whereas the latter is not. However, both involve the same underlying asset - Bitcoin.

Permitting the Exchange-Traded Product for Bitcoin

In 2013, the Winklevoss brothers submitted the first application for a Bitcoin spot ETP to the SEC. Despite numerous subsequent applications under federal securities regulations, all have been denied by the SEC citing concerns over fraud and investor protection. {showAds}

However, the SEC has allowed for Bitcoin ETFs, creating a clear double standard. This inconsistency was recently challenged by Grayscale Investments, LLC in 2022. On August 29, 2023, the DC Circuit Court of Appeals deemed the SEC's treatment of these products as "arbitrary and capricious" and criticized their failure to provide reasoning for the differing treatment.

The decision was not appealed by the SEC and instead, a review was launched for 11 applications of Bitcoin spot ETPs.

What is the significance of this?

In January 2024, the SEC gave the green light to 11 spot Bitcoin ETP applications from major entities including Blakcrock, Grayscale, Fidelity, VanEck, ARK 21Shares, and others. This decision allows for investment in Bitcoin and the creation of derivative products for retail investors. {showAds}

The first day of trading saw a significant trading volume of $4.6 billion, indicating a high level of market interest in the crypto industry.

The current situation highlights the importance of the SEC reevaluating its methods of regulating crypto assets. The current approach may seem contradictory as the SEC imposes strict restrictions on primary crypto activities and emerging startups, indicating a suspicion of potential fraud.

However, at the same time, it allows established financial institutions to engage in secondary trading. This suggests that the SEC only trusts a limited number of individuals to safely participate in the crypto market.

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