The Bitcoin spot ETF is expected to be approved, which has triggered heated discussions in the market. According to the timetable of 21Shares Bitcoin ETF, the first Bitcoin spot ETF may be born on August 11. However, some people believe that the SEC may prefer to let BlackRock's iShares Bitcoin Trust become the first approved Bitcoin spot ETF.

1. What is ETF?

ETF, or Exchange-Traded Fund. An exchange-traded fund (ETF) is an investment vehicle that tracks the price of an asset, security, or index. ETFs pool investors' money and aim to achieve the same return as the underlying asset.

In recent years, many companies in the industry have been working hard to apply for Bitcoin ETFs. Bitcoin ETFs are divided into: Bitcoin Spot ETF and Bitcoin Futures ETF. Bitcoin Spot ETF tracks the market price of BTC in real time, while Bitcoin Futures ETF tracks the price of Bitcoin futures contracts.

According to the definition on the SEC's official website, a Bitcoin futures ETF is a standardized agreement for buying and selling a specific amount of Bitcoin at a specified price on a specific date in the future. Currently, the SEC has approved six Bitcoin futures ETFs. Since Bitcoin futures ETFs do not invest directly in Bitcoin, this is not the most ideal way to invest in Bitcoin.

Therefore, the industry has been eager for the launch of a Bitcoin spot ETF.

2. Current Status of Bitcoin ETF

Registering a Bitcoin ETF with the SEC has always been a difficult issue, especially a Bitcoin spot ETF. To date, the SEC has not approved any such spot ETF applications due to concerns about potential fraud or manipulation in the spot market. In contrast, the SEC has approved six Bitcoin ETFs for futures trading.

1. 6 Bitcoin futures ETFs approved by the SEC

Previously, the SEC mainly approved the following six Bitcoin futures ETFs:

Proshares (BITO): Proshares Bitcoin Strategy ETF, codenamed BITO, currently has $997 million in assets under management. It was approved by the SEC on October 18, 2021 and is traded on the NYSE Arca Exchange. In BITO's fund investment strategy, it is clearly stated that "The fund invests primarily in bitcoin futures contracts. The fund does not invest directly in bitcoin." The ETF was very popular when it debuted, with a trading volume of more than $1 billion in just two days.

Proshares (BITI): Proshares Short Bitcoin ETF, with the ticker BITI, currently has $139 million in assets under management. Launched in June 2022, it is the only Bitcoin short ETF currently approved by the SEC.

Valkyrie (BTF): The Valkyrie Bitcoin Strategy ETF trades on the Nasdaq under the ticker BTF and currently has $31 million in assets. It was approved on October 21, 2021. The custodian is US Bank. The Valkyrie ETF is classified as a "non-diversified" fund under the Investment Company Act of 1940. VanEck (XBTF): The VanEck Bitcoin Strategy ETF trades on the Cboe BZX Exchange under the ticker XBTF and currently has $46.5 million in assets. Launched on November 15, 2021, this ETF has a unique advantage in that it is a C-corp, which is different from other ETFs (registered as investment corporations). This is a tax-efficient structure because C-corporations are not required to distribute long-term capital gains to investors as dividends. For investors, this approach may reduce taxable distributions, leaving more money to invest in the fund.

Simplify (MAXI): Simplify Bitcoin Strategy PLUS Inc ETF was launched in September 2022 and is traded on Nasdaq. Since the ETF uses three strategies (Bitcoin Futures, Income, Option overlay) to achieve the ETF's investment objectives, and its actual allocation is mainly US Treasury bonds, MAXI is not well-known in the industry compared to the previous three Bitcoin futures ETFs. The current asset management scale is US$25 million.

Global X (BITS): The Global X Blockchain & Bitcoin Strategy ETF was launched in November 2021 and currently has $10 million in AUM. The ETF is characterized by 50% investment in CME Bitcoin futures contracts and 50% investment in shares of its sister ETF (Global X Blockchain ETF, BKCH). This BKCH ETF has a range of blockchain stocks, including MARA, COIN, HUT CN, RIOT, APLD, BTBT, etc. It basically covers the stocks of mainstream digital asset mines, cryptocurrency exchanges, and blockchain development companies currently listed on the Nasdaq. Since the ETF is not fully invested in Bitcoin futures, it is not well-known in the industry.

In addition to the six Bitcoin futures ETFs approved by the SEC, there are also some Bitcoin futures ETFs that are not approved by the SEC, or Bitcoin futures ETFs in other countries, or even spot ETFs. For example: the Hashdex Bitcoin Futures ETF approved by the CFTC and traded on the NYSE Arca Exchange; the CSOP BTC Futures ETF traded on the Hong Kong Stock Exchange; the Purpose BTC Spot ETF, 3iQ BTC Spot ETF, and Horizons BTC Leveraged ETF traded on the Toronto Stock Exchange.

2. How long will it take for Bitcoin spot ETF to be listed?

Historically, the Bitcoin spot ETFs rejected by the SEC mainly include:

As can be seen from the table, the SEC has rejected dozens of Bitcoin spot ETF applications in the past few years. In all cases, the SEC's rejection reasons are mainly three points:

1. The applications failed to demonstrate that the ETFs were “designed to prevent fraudulent and manipulative practices”;

2. These applications fail to demonstrate that these ETFs are “designed to protect investors and the public interest”;

3. The issuers of these applications have inadequate filings and lack necessary information.

The Bitcoin spot ETFs currently waiting in line for approval include the following:

The applicants for the Bitcoin spot ETF that have attracted the most market attention during this period are mainly BlackRock and Fidelity.

BlackRock

BlackRock, the world's largest asset management company, applied for a Bitcoin spot ETF on June 15 and recently resubmitted the application. The new document mentions that Coinbase is listed as a cooperative market in the "Surveillance-sharing agreement."

If approved, BlackRock’s iShares Bitcoin Trust will trade on the Nasdaq and use Coinbase Custody as its cryptocurrency custodian and Bank of New York Mellon as its cash custodian, with Coinbase, Inc. as its SSA partner market.

Whether the iShares Bitcoin Trust is an ETF or a Trust is controversial in the industry. However, the iShares Bitcoin Trust applied by BlackRock has a key difference from the GBTC issued by Grayscale - it is more flexible, can be redeemed, and has authorized participants (APs) - this is critical and can avoid long-term premiums or discounts like GBTC. (Authorized participants, i.e., Authorized Participants, are one of the main participants in ETF subscription and redemption)

Fidelity Investments

Wise Origin Bitcoin Trust is a spot Bitcoin exchange-traded fund managed by Fidelity. In its proposal submitted to the SEC, it previously applied to list the ETF on the BZX exchange under CBOE. Recently, it also added Coinbase as a cooperative market for monitoring the sharing agreement, and vaguely stated that "a custodian authorized by the New York Department of Financial Services will be responsible for the custody of the Trust's Bitcoin.

3. Factors that may affect the application results of Bitcoin spot ETF

1. Monitoring sharing agreement

Surveillance-sharing agreement. According to the SEC’s definition: The characteristics of a surveillance-sharing agreement are that the agreement provides for the sharing of information about market trading activities, clearing activities, and customer identities; both parties to the agreement have reasonable ability to obtain and provide the requested information; and no existing rules, laws, or practices will prevent one party from obtaining this information from or providing this information to the other party.

Take the Wise Origin Bitcoin Trust applied by Fedelity as an example. On June 30, CBOE BZX submitted a document proposing to list and trade Wise Origin Bitcoin Trust, which clearly stated that “The Exchange is expecting to enter into a surveillance-sharing agreement with Coinbase, Inc.” (Warm reminder, the content about SSA is on pages 68-69 of this 194-page document).

In this rule filing, regarding the monitoring sharing agreement, it is expected that the spot BTC SSA will have the characteristics of a monitoring sharing agreement between two members of the ISG, which will enable the Exchange to obtain data about spot Bitcoin transactions occurring on Coinbase as part of its plan to monitor ETFs, in a manner similar to the way the Exchange shares information in the ISG, when it determines it is necessary. If the Exchange and Coinbase reach such an agreement, the Exchange will include the spot BTC SSA in its market monitoring plan before allowing shares to trade. This spot BTC SSA is combined with the information provided by the ISG related to CME Bitcoin futures, and the Exchange believes that CME Bitcoin futures itself represents a sizable regulated market, which will further enhance the Exchange's ability to detect and prevent market manipulation.

In summary, monitoring sharing agreements can help detect and stop improper behavior, prevent fraud and manipulation, and protect investors and the public interest. Many people in the industry currently believe that this may be the most critical change in determining the approval of Bitcoin spot ETFs.

When applying for a Bitcoin spot ETF, there are several key roles: Sponsor, Exchange, Trustee, Cash Custodian, Bitcoin Custodian, Authorized Participants, and SSA, which monitors the shared protocol market.

It is observed that in terms of choosing exchanges for listing, BlackRock and Valkyrie chose NASDAQ, ARK/21Shares, Invesco, WisdomTree, VanEck, and Fidelity chose CBOE BZX, and Bitwise chose NYSE Arca. In terms of cash custodians, most of them choose large American banks, such as Bank of New York Mellon. The choice of cash custodian should not be the key to whether the ETF is passed or not; cryptocurrency custodians may be more important, and perhaps Coinbase Custody is the choice that the SEC likes; authorized participants AP are also very important, which is the key to maintaining the supply and demand balance and liquidity of ETFs; the SSA market helps to detect improper behavior, prevent fraud and manipulation, and may be one of the most core roles considered by the SEC.

Whether these roles are ready and whether each role has a company that can meet SEC requirements may have a significant impact on whether the Bitcoin spot ETF can be successfully launched.

Reference Documents:

https://www.sec.gov/Archives/edgar/data/1980994/000143774923017574/bit20230608_s1.htm

https://www.proshares.com/globalassets/proshares/fact-sheet/ProSharesFactSheetBITO.pdf

https://valkyrie-funds.com/btf/

https://www.vaneck.com/us/en/investments/bitcoin-strategy-etf-xbtf-fact-sheet.pdf

https://www.sec.gov/Archives/edgar/data/1810747/000182912622008639/simplifyexchange_485apos.htm

https://www.sec.gov/rules/sro/cboebzx/2023/34-97732.pdf

https://cdn.cboe.com/resources/regulation/rule_filings/pending/2023/SR-CboeBZX-2023-044.pdf