Digital-asset managers want to convert their funds into bitcoin spot ETFs. The SEC hasn’t agreed.
It looks a bit like a strategy straight out of Sun Tzu’s “The Art of War.”
One of the cardinal rules the Chinese military strategist and philosopher recommends: make your opponent understand that they have no chance to get away with it if you engage in combat — a psychological victory in a way.
This is the strategy that the bitcoin evangelists seem to have adopted vis-à-vis the U.S Securities and Exchange Commission.
What’s at stake: Getting the market watchdog to approve spot exchange-traded funds, or ETFs, based on actual bitcoin holdings. The SEC so far refuses to do this, even though it approved the first ETFs based on bitcoin futures in October.
Illogical, say the evangelists of bitcoin. Faced with the agency’s stubborn stand, they decided to assail it with repeated demands and requests. The goal is to pressure the federal agency to yield once it has exhausted all its arguments.
The latest episode is about Grayscale Investments, which wants to convert its Grayscale Bitcoin Trust (GBTC) – Get Grayscale Bitcoin Trust ETF Report into a bitcoin spot exchange-traded fund.
What’s the SEC Worried About?
The company had filed its case in October and was expecting a response from the SEC in December. Once the time to give its answer came, the SEC granted itself an additional 45 days and finally gave its verdict in early February.
That’s not really a clear answer since the SEC has opened a 21-day period for public comment and an additional 14 days to respond.
The regulator is concerned about the risks of manipulation and the liquidity and transparency of the bitcoin market. The SEC questions how Grayscale will manage potential price manipulation.
“The Commission seeks comment on the following questions and asks commenters to submit data where appropriate to support their views,” the SEC wrote in its notice.
The agency added: “What are commenters’ views on whether the proposed Trust and Shares would be susceptible to manipulation? What are commenters’ views generally on whether the Exchange’s proposal is designed to prevent fraudulent and manipulative acts and practices?
“What are commenters’ views generally with respect to the liquidity and transparency of the bitcoin markets, the bitcoin markets’ susceptibility to manipulation, and thus the suitability of bitcoin as an underlying asset for an exchange-traded product?”
A few days prior, the SEC also delayed its response to a similar request from Bitwise on the same grounds. The agency gave Bitwise 21 days to respond to its concerns. Bitwise Investments wants to turn Bitwise Bitcoin ETP Trust into a spot bitcoin ETF.
A Yes Response Is Unlikely
While one cannot guess in advance what the SEC’s response will be in either case, the track record shows that it should be no.
The SEC in recent months has rejected requests from several funds — WisdomTree, Fidelity Investments, and SkyBridge Capital. Skybridge is led by Anthony Scaramucci, the short-tenured White House communications director under President Donald Trump.
At the end of October 2021, after years of waiting, the SEC finally allowed one of the many bitcoin ETF projects submitted to it to pass, then others thereafter. But all these authorized ETFs have the characteristic of being based on bitcoin futures, not on real underlying bitcoin reserves (spot ETFs).
VanEck both benefited and suffered from this SEC dichotomy, by being accepted for a futures ETF on bitcoin and being denied a bitcoin spot ETF almost at the same time.
But instead of being discouraged, all these pioneers of digital asset management are redoubling their efforts and are determined not to give up.
“We believe converting $GBTC into a #Bitcoin Spot ETF is in the best interests of investors. As we work towards this goal, read about some of the legal and regulatory matters at hand,” Grayscale, a unit of Digital Currency Group, tweeted recently.
Grayscale does not hesitate to ask for the help and support of the public.
“Great question. If you’re interested in sharing your thoughts with the SEC on whether $GBTC should be allowed to convert into an ETF, visit this link and click “Submit Comments on SR-NYSEArca-2021-90″,” the company posted on Twitter.
Why Is It So Important to Convert Bitcoin Trust Funds Into Spot ETFs?
Converting their bitcoin funds into spot ETFs would enable them to preserve their edge in cryptocurrency investing as other companies seek to make similar moves.
Pioneers of digital-asset management have long been the few options for investors seeking exposure to bitcoin via the stock market. But that changed when the SEC authorized futures ETF on bitcoin.
In addition, other countries, notably Canada, have already taken the plunge. Ottawa approved its first bitcoin spot ETFs a year ago.
U.S. digital-asset-management pioneers could thus lose their competitive edge. The surge in bitcoin prices has prompted many institutional investors to want to invest in it. They then turned to the few digital asset managers, creating an imbalance between supply and demand.
But approval of bitcoin spot ETFs elsewhere is pushing investors to liquidate their positions in these trusts.
These trusts also fear being less competitive because new funds would normally charge less.
Furthermore, investors subscribing to new shares issued by a trust must wait six months before they can trade the shares on the secondary market, while ETF investors do not face this type of restriction.
Although anyone can buy and own bitcoin today, it remains difficult for regular investors with brokerage accounts to manage cryptocurrencies as part of their portfolios.
Grayscale Investments, for example, currently trades only via the OTC market. But if it became an ETF, it would transfer to national exchanges like the New York Stock Exchange and Nasdaq.
Shortly after the conversion, the price gap with bitcoin – whether premium or discount at the time – would likely disappear. This means that investors who bought the fund at a discount could see gains regardless of fluctuations in bitcoin’s price.
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