The US Securities and Exchange Commission (SEC) has approved spot exchange-traded funds (ETFs) that invest directly in Bitcoin in a landmark move that is poised to usher in a surge of institutional investments in the digital assets sector and broaden access to the leading cryptocurrency.
The US regulator has allowed ETF funds from fund managers Invesco, Fidelity, BlackRock, Valkyrie and seven others to begin trading starting Thursday. ETFs will allow investors to buy bitcoin as easily as stocks or mutual funds.
However, even as it approved the listing and trading of some spot Bitcoin ETFs, SEC issued a cautionary note.
“While we approved the listing and trading of certain spot Bitcoin ETP (exchange traded product) shares today, we did not approve or endorse Bitcoin,” SEC chairman Gary Gensler said in a note. “Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto.”
Bitcoin had rallied to the highest level in about two years in the days leading to the regulatory green signal for such funds.
The digital currency traded around $46,000 levels late Wednesday, up from $17,000 in January 2023.
Retail investors thus far could only trade digital currencies on crypto exchanges and incur high transaction fees. They could also buy financial products that tracked the digital currency indirectly such as bitcoin futures.
To be sure, there are at least six bitcoin-futures ETFs that use futures contracts to provide exposure to bitcoin price changes. These, however, vary significantly from the spot price.
The SEC has in the past turned down proposals for spot bitcoin ETFs, citing concerns over the susceptibility of the underlying market to fraud and market manipulation. Gensler had sought enhanced guardrails to protect investors before allowing a wide range of investors to enter the cryptocurrency market.
“Beginning under Chair Jay Clayton in 2018 and through March 2023, the Commission disapproved more than 20 exchange rule filings for spot bitcoin ETPs. One of those filings, made by Grayscale, contemplated the conversion of the Grayscale Bitcoin Trust into an ETP,” Gensler said in the statement.
Gensler said SEC is faced with a new set of filings, similar to those that it had disapproved in the past, but that “circumstances have changed.”
The US Court of Appeals for the District of Columbia held that SEC failed to adequately explain its reasoning in disapproving the listing and trading of Grayscale’s proposed ETP.
Following the setting aside of the Grayscale order and the court’s call for SEC to review the order, “the most sustainable path forward is to approve the listing and trading of these spot bitcoin ETP shares,” Gensler said.
Drawing on past experience
The SEC also said that it does not approve or endorse crypto trading platforms or intermediaries, which, for the most part, are non-compliant with the federal securities laws and often have conflicts of interest.
“Since 2004, this agency has had experience overseeing spot non-security commodity ETPs, such as those holding certain precious metals. That experience will be valuable in our oversight of spot bitcoin ETP trading,” Gensler said.
“Though we’re merit neutral, I’d note that the underlying assets in the metals ETPs have consumer and industrial uses, while in contrast bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing,” Gensler added.
Fake post on SEC approval
A fake post from the SEC’s compromised account on X (formerly Twitter) on Tuesday said trading of bitcoin ETFs had been approved but the regulator had not issued any approval.
The SEC swiftly removed the post, and X subsequently said that the account breach occurred due to an ‘unidentified individual’ gaining control of a phone number.
US authorities, including the Federal Bureau of Investigation (FBI), said they are probing the post.
Analysts said they expect volatility in Bitcoin prices over the shorter-term following the SEC order.
Ashish Singhal, co-founder and group chief executive at crypto app CoinSwitch, said the SEC approval will “bring some short-term volatility in the market”, but the bigger picture is its long-term potential.
Spot Ethereum ETF
Rajagopal Menon, vice-president of WazirX, India’s largest crypto exchange, said the companies involved in these ETFs will effectively become marketing teams for Bitcoin, helping attract substantial institutional investment into the sector.
Menon highlighted the significance of the approval’s timing, noting that April is a critical month due to Bitcoin’s halving — a process that reduces the supply of new Bitcoins, potentially leading to a ‘supply shock.’
“April is the month of halving, and the supply shock plus the excessive money supply is the perfect storm for Bitcoin price,” Menon said.
The focus, Menon said, will eventually shift to Ethereum, as speculation grows about the possibility of an Ethereum ETF.
“When it comes to India, it all boils down to regulation. Regulatory discussions have been happening in the US for the past few years. The SEC has accepted that Bitcoin is a commodity and not a security. India is yet to have this type of discussion. Things will change as India is a signatory to the G20 Delhi declaration, which outlines the regulatory roadmap,” he added.
India regulators , meanwhile, have stepped up a crackdown on offshore crypto exchanges that operate without registering in the country.