The white whale of the mutual-fund industry—an exchange-traded fund that owns Bitcoin—is in Wall Street’s sights. This time, there’s some hope they catch it.
Bitcoin‘s market capitalization has surged 78% this year to $573 billion, making it one of the most valuable assets not held by an ETF. The Securities and Exchange Commission has routinely rejected efforts to create one, citing a lack of surveillance on the platforms where Bitcoin trades and the potential for fraud and market manipulation.
But...
The SEC has rejected the creation of exchange-traded funds that own Bitcoin. There are two potential reasons it could happen this time, however.
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The white whale of the mutual-fund industry—an exchange-traded fund that owns Bitcoin—is in Wall Street’s sights. This time, there’s some hope they catch it.
Bitcoin ‘s market capitalization has surged 78% this year to $573 billion, making it one of the most valuable assets not held by an ETF. The Securities and Exchange Commission has routinely rejected efforts to create one, citing a lack of surveillance on the platforms where Bitcoin trades and the potential for fraud and market manipulation.
But fund companies have reason to believe the agency might need to soon give in, whether or not it wants to.
Late Tuesday, fund companies Invesco (ticker: IVZ) and WisdomTree (WT) refiled applications with the SEC to launch ETFs that hold actual Bitcoin, unlike the Bitcoin-futures products already on the market. They joined BlackRock (BLK), which filed its own application last week.
Bitcoin investors cheered the news, with the token up 17% since BlackRock’s application to about $29,439.
BlackRock and Invesco declined to comment.
“This is a firm continuation of our stance from our initial filing based on WisdomTree’s extensive experience in ETFs and our belief in the power of transparency and putting out products that meet high regulatory, compliance and security frameworks that lead to success for investors,” said WisdomTree head of digital assets Will Peck, in a statement.
The SEC declined to comment.
The first reason for hope is a wrinkle in BlackRock’s application. Unlike some prior efforts, BlackRock says it will share surveillance of a trading platform with Nasdaq, an attempt to satisfy the SEC’s earlier concerns. In approving Bitcoin futures ETFs, such as ProShares Bitcoin Strategy (BITO), the SEC was appeased by market surveillance on the Chicago Mercantile Exchange, where such futures trade. In contrast, the vast majority of platforms that trade spot Bitcoin, such as that of Coinbase
Most crypto trading platforms, including Coinbase, say they do perform extensive monitoring for manipulation despite not registering with an agency, and that there’s no legitimate path to register with the SEC even if a company tried.
The second reason for optimism is a pending court case in the U.S. Court of Appeals for the District of Columbia Circuit between the SEC and Grayscale Investments. Grayscale for years has sought in vain to convert a fund it runs, the Grayscale Bitcoin Trust (GBTC), into an ETF.
The trust, which is the industry’s largest at $17.5 billion under management, trades like a closed-end fund with a price that can deviate widely from that of the Bitcoin it holds. On Tuesday, the fund traded at a 33% discount. Grayscale charges a hefty 2% annual fee on the fund’s assets, which its executives have said would come down if it converted to an ETF.
Grayscale last year sued the SEC alleging that it violated the law by treating Bitcoin futures and Bitcoin spot ETFs differently. At a hearing this March, judges sounded skeptical of the agency’s arguments distinguishing between surveillance of the products’ underlying markets.
The court could issue a decision in that case any day, and Grayscale has said it expects it by the fall.
Even if Grayscale wins the case, the approval of a spot ETF isn’t guaranteed. The SEC could reject the ETF on some other basis or try to rewind its approval of Bitcoin futures ETFs. It could also seek to appeal the appellate court’s decision to the Supreme Court, if the Solicitor General agreed to take up the case.
But even with those uncertainties, Wall Street clearly sees value in rejoining the race for a Bitcoin ETF and for the lucrative fees such a product could generate.
Write to Joe Light at joe.light@barrons.com