The US Securities and Exchange Commission (SEC) is making 2024 a significant year for exchange-traded products (ETPs) by declaring effective the registration statements of ten Bitcoin ETPs, and approving their listing on one of the major stock exchanges. This is a monumental step to bringing access to Bitcoin to a broader retail market in the US For over a decade, the staff of the SEC (Staff) had denied or otherwise blocked applications to list spot Bitcoin ETPs, claiming, in part, that there were insufficient protections against market manipulation in the underlying Bitcoin market. The approvals issued this week unlock – although do not widely open – a previously dead bolted door to registered products offering direct exposure to Bitcoin, providing an opportunity for retail investors to have easier access to exposure to Bitcoin in a regulated product.
The approvals follow the US federal appeals court ruling in August 2023 that the SEC was “arbitrary and capricious” in its decision to reject an application by the NYSE Arca to list shares of the Grayscale Bitcoin Trust. In granting the approvals, Chair Gensler acknowledged that the law had changed following the Grayscale decision stating “we are now faced with a new set of filings similar to those we have disapproved in the past. Circumstances, however, have changed.” Rather than appeal the court ruling, the staff of the SEC chose to engage with the sponsors of proposed spot Bitcoin ETPs to discuss parameters necessary for approval, including the inclusion of additional disclosure and other requirements to provide for investor protection. In approving the listing of the ETPs, the SEC relied, in part, on its confirmation that the “CME bitcoin futures market has been consistently highly correlated with this subset [(Coinbase and Kraken)] of the spot [B]itcoin market throughout the past 2.5 years,”1 a fact which was heavily leaned upon in the Grayscale decision. Among the requirements insisted upon by the Staff were requirements that the ETPs effect sales and redemptions of ETP creation units solely in cash (rather than in-kind) and hardcoding of key service providers (including Bitcoin custodians) into the listing rule. The SEC approved all listing rule applications simultaneously, in an effort to prevent a single ETP from having a first mover advantage.
While this initial round of approvals is promising for the ETP and cryptocurrency industries, it does not signal a general acceptance of all spot cryptocurrency ETPs. Rather, the SEC granted approval only to ETPs investing in Bitcoin, and it is unclear whether it will be receptive to products investing in other crypto assets. Chair Gensler’s statement in announcing the approvals indicated that he and the staff remain skeptical of digital assets generally, including Bitcoin, stating that the approval is not an endorsement of Bitcoin and that investors should remain cautious and aware of the risks. Issuers wishing to offer similar products with other digital asset investments may now have examples to follow, but will still need to undergo a comprehensive review process, and ultimate approval is not guaranteed. Moreover, future exchange-traded products seeking to directly invest other cryptocurrencies or digital assets may have to satisfy a correlation test similar to that which was relied on by the SEC in approving the current products and may not be able to do so.
1 SEC Release, Order Granting Accelerated Approval of Proposed Rule Changes, as Modified by Amendments Thereto, to List and Trade Bitcoin-Based Commodity-Based Trust Shares and Trust Units, No. 34-99306 (10 January 2024).