In the long and winding road that is the race to approve the first Bitcoin exchange-traded fund (ETF) in the United States, BlackRock is now at the finish line. After months of lobbying and filing with the U.S. Securities and Exchange Commission (SEC), the asset manager has crafted a proposal that it believes should satisfy the regulator’s requirements. As the SEC wrestles with its decision, the case for approving the ETF is becoming increasingly compelling, and BlackRock is optimistic that the outcome will favor its offering. This article examines the proposal and examines why the SEC should take the “win” and approve BlackRock’s Bitcoin ETF.
1. The Growing Need for a Bitcoin Exchange-Traded Fund
The need for Bitcoin exchange-traded funds (ETF) is growing as more and more investors turn to cryptocurrency and blockchain technology. ETFs offer investors the ability to trade and invest in the digital asset without the risks associated with holding the coins themselves, such as theft and volatile prices.
A Bitcoin ETF now looks increasingly likely. In 2018, the U.S. Securities and Exchange Commission (SEC) rejected several proposed Bitcoin ETFs, such as those from the Winklevoss brothers. But in 2020, the SEC is actively evaluating several applications for a Bitcoin ETF.
There are many advantages to a Bitcoin ETF. It would be easier to trade, since it would be tradeable on the stock exchanges. A Bitcoin ETF would also vastly improve liquidity in the Bitcoin market. Finally, it would give institutions an easy way to invest in the cryptocurrency and it would open the door for retail investors who do not want to buy the coins directly.
2. BlackRock Inc.’s Bitcoin ETF Proposal
BlackRock Inc., the world’s largest asset manager, has proposed a Bitcoin ETF in the US. The news that the investment giant was looking into the possibility of such an ETF sent ripples through the markets when it was announced.
The main goals of BlackRock’s Bitcoin ETF proposal are to make investing in Bitcoin easier, and to increase exposure to the digital asset class. If successful, it would be the first Bitcoin ETF listed on a public exchange in the US.
The proposal is currently being reviewed by the U.S. Securities and Exchange Commission (SEC). It is likely they will consider factors such as market manipulation, capitalization, and liquidity. If approved, the ETF would be available for trading on the New York Stock Exchange, in which BlackRock has a significant stake.
- Upsides:
- Increased ease of access to Bitcoin
- Increased exposure to the asset class
- Accessible to a wider range of investors
- Downsides:
- Potential market manipulation or excessive speculation
- Limited capitalization
- Inadequate liquidity
3. Examining the Regulatory Challenges of the Bitcoin ETF
The proposed Bitcoin Exchange Traded Fund (BIT) has attracted significant attention as the Securities and Exchange Commission (SEC) evaluates the launch of the fund. While a Bitcoin ETF would give investors the ability to invest in Bitcoin in a regulated format, there are challenges affiliated with the regulatory process that need to be considered.
Custody of the Funds
- A key concern of the SEC is the safekeeping of the fund’s assets. With a traditional fund, the custodian is responsible for financial controls and safekeeping of the assets.
- Bitcoin-based funds are highly reliant of technology, and the SEC is concerned that the ETF offers sufficient protection for investor assets.
- Bitcoin’s decentralized nature and its lack of physical form means that there is no third party involved in safekeeping the investors’ assets.
Manipulation and Fraudulent Activity
- The second major obstacle is related to the potential for manipulation and fraudulent activity since Bitcoin is globally accessible for trading.
- Market volatility and pressure from large-scale trading could manipulate prices in favor of individual traders.
- These outside influences have greater control over the Bitcoin industry than they would a more traditional stock, making the ETF more susceptible to manipulation.
IRS-Approved Designation of the Fund
- The Bitcoin ETF’s proposed structure must also be approved by the IRS. The timeframe of the approval for the fund is unknown.
- As part of the approval process, the IRS must determine the appropriate tax classification for the Bitcoin ETF.
- The IRS may decide that payments to investors must come from gains generated from the trading of Bitcoin, or decide that the fund should be taxed as a property, putting investors at risk of additional taxes.
4. How the SEC Should Move Forward with Approval
As the SEC’s deadline to approve a Bitcoin ETF looms, the Commission must evaluate the submitted proposals and make a decision that will ensure fairness and stability in the exciting world of cryptocurrencies. Here are four ways the SEC should move forward in order to ensure the development of vibrant markets.
Adopt Appropriate Regulations The SEC must examine the integrity of markets that list and trade Bitcoin products like ETFs and, if necessary, prescribe regulations that protect the public interest and foster market development.
- Improve surveillance procedures to monitor trading activity
- Implement strict rules for market participants
- Introduce regulations for the safekeeping of Bitcoin
Approve Sensible Investment Options With an understanding of emerging market needs and standards, the SEC should approve Bitcoin ETFs that safeguard against any potential market inefficiencies and capital losses.
- Establish a minimum threshold for fund size
- Introduce investor-friendly fees
- License qualified professionals to manage funds
Engage in Dialogue With Marketplace Stakeholders At this critical juncture, the SEC should rely on experts in the fields of technology, economics, finance and investor relations to ensure the proper and deliberate evaluation of Bitcoin ETFs.
- Gather feedback from cryptocurrency exchanges
- Invite advice from investors and academics
- Consult industry professionals on best practices
The only question now is when the SEC will greenlight a Bitcoin ETF. If the SEC follows the advice of its staff and takes the win, an ETF should finally be approved in the near future and opening up the market to a much broader range of investors. This would be a long-awaited step forward in bringing cryptocurrencies into the mainstream.
