Discover more from Digital Bytes
BTC, ETFs: why they matter and, strangely, is the SEC doing investors more harm than good?
An exchange-traded fund (ETF) functions in a similar to a mutual fund, pooling investments from multiple investors. But, unlike mutual funds, ETFs are tradable on stock exchanges similar to regular stocks and debt instruments. Pursuant to Statista: “There were 8,754 ETFs globally in 2022, compared to 276 in 2003. As of 2022, ETFs worldwide managed assets up to almost 10 trillion U.S. dollars.” And, according to CNBC in the US, the first ETF was launched in 2003 and now has 29.6% market share of savers’ funds.
ETFs can vary widely, tracking anything from individual commodity prices to diverse portfolios, indices or specific investment strategies. “Anything” changed to “except cryptocurrency” when, in 2014, the SEC turned down the ETF proposal for Bitcoin filed by the Winklevoss twins and many other entities. In 2021, over twelve applications were received by the SEC but the same 2018 answers were given to them. The SEC was concerned about the low liquidity, market manipulation forces and lack of transparency at crypto exchanges. Regardless of this, whilst the US has allowed BTC ETFs based on futures to be launched, no ETFs based on actual (sometimes referred to as spot priced Bitcoins) trade in the US. Closest to an ETF being traded has been the Grayscale Bitcoin Trust (GBTC) which is not open to the public - until it tried being publicly available On June 29th, 2022, Grayscale filed to convert its GBTC into a listed Bitcoin exchange-traded ETF and become accessible to the public. However, once again the SEC turned it down and Grayscale filed a petition challenging the SEC’s decision, which it won on August 29th, 2023. The US Court of Appeals said that the SEC gave no concrete reasons for dismissing and so Grayscale so Grayscale petition for review was approved, leading to the SEC's decision to deny GBTC's listing application was overturned. It is not only ETFs that have been frustrated and challenged by the SEC in the US. In its lawsuit in 2020, Ripple was accused by the SEC of breaking securities law through its sale of $1.3 billion worth of XRP. Ripple Labs argued that XRP was not a security but a commodity when it was sold; the court affirmed Ripple’s position. Ripple’s Chief Legal Officer, Stuart Alderotti, explains that, “SEC is getting battered in court. In our case it has been proved wrong, has been called hypocritical, lacks due diligence to the law, fined for misuse of discovery and now another eminent court says it is ‘arbitrary and arbitrary’ - It’s a really big deal.”
Source: X (formerly Twitter)
Whilst there are those who are jubilant about the SEC losing against firms such as Ripple and Grayscale, it is also easy to misconstrue the court order as the approval of spot Bitcoin ETFs. Crypto enthusiasts need to be cautious not to read too much into these recent court cases. Chris Larsen, co-founder and executive chairman of Ripple Labs, faulted the SEC, in particular its chairman, Gary Gensler “as lovers of the confusion that comes with the rules they set, since ‘it gives him more power’”. Larsen believes clear rules can only come from elected officials because, in theory, they intrinsically have the interest of the US at heart. Furthermore, he bemoaned the opportunities being lost by the US (e.g. San Francisco) as more businesses are relocating to other jurisdictions such as Dubai, London and Singapore - resultant from these countries giving greater clarity and embracing digital assets and a new way of doing business.
Meanwhile, Gabriel Shapiro, General Counsel at Delphi Labs has said: “So far, every time they lose in court they just shamelessly say the judge got it wrong and pursue more shenanigans.” And Austin Campbell, Managing Partner at Zero Knowledge Consulting, explains how exhausting it is taking the SEC on. “For many companies, fighting back is incredibly expensive (you will win, but you’ll be bankrupt when you do) or you’re a financial conglomerate where the SEC can f..k up the rest of your business in the meantime. Gangster behavior. Gangster behaviour.” Although this development will go a long way towards the mainstream adoption of tokens a decision has still not been made, and the six other applications to the SEC have been postponed. In addition, regulated asset managers such as Bitwise, Wise Origin, WisdomTree, Invesco Galaxy, Valkyrie and VanEck have longer waiting periods; some feel the SEC will circumvent the application. Given this backdrop of uncertainty in the US, whilst many do not know when a spot priced Bitcoin ETF will be authorized by the SEC, they are certain it is coming. In the interim, much to the frustration of US-based asset managers and US investors endeavouring to gain exposure to Bitcoin via an ETF, they see other jurisdictions (such as Hong Kong) progressing plans to launch their own spot priced Bitcoin ETFs.
Seemingly, for investors, cryptocurrencies share some of the characteristics of smaller companies. Akin to cryptos, these companies are relatively under-researched and can be illiquid. Furthermore, many institutions do not invest directly into smaller companies but gain access to them via specialist smaller company asset managers and their various collective investment funds. One cannot help wondering whether, in the cold light of day, regulators ever ponder on their actions. After all, surely enabling investors to have a choice of what they do with their money is ultimately their decision? Whilst the SEC claims that it is protecting investors and maintaining confidence in the financial sector, one cannot help but question would it not be better to allow investors access to various crypto currencies using a collective investment wrapper such as an ETF, especially if the ETF is being promoted and managed by a regulated and robust asset management organization? The ongoing struggle over Bitcoin ETFs and the SEC's stance raises important questions about regulatory influence and innovation in the crypto space. Whilst legal victories by companies such as Ripple and Grayscale suggest a challenge to the SEC's authority, it is crucial not to over-interpret these outcomes in the context of spot Bitcoin ETFs. Unsurprisingly, this uncertainty in the US has prompted other countries to explore their own ETFs whereby potentially shifting the competitive landscape. This situation leads to the fundamental question of whether regulators should prioritize investor protection and market confidence over expanding investment choices, especially if ETFs are managed by credible asset management organizations. And the answer to this could significantly have an impact on the mainstream adoption of digital assets….