On January 10, 2024, the Securities and Exchange Commission (“SEC”) approved the listing and trading of several spot Bitcoin exchange-traded products (“ETP”). In what has been referred to as “a huge positive for the institutionalization of bitcoin as an asset class,” the SEC’s decision comes after financial institutions spent years attempt to gain approval for these exchange-traded products.
The first attempted creation of a Bitcoin exchange traded-fund (“ETF”), which is similar to an ETP, came in 2013, when Tyler and Cameron Winklevoss first proposed a Bitcoin ETF to the SEC, which was rejected. Over the next 10 years, the SEC rejected numerous applications to create Bitcoin ETPs or ETFs, rejecting over 20 applications from 2018 to 2023 alone.
However, in 2023, the U.S. Court of Appeals for the District of Columbia Circuit “vacated the SEC’s decision to reject the application by Grayscale Investments, LLC to convert the Grayscale Bitcoin Trust into a spot bitcoin ETF.” The circuit court held that the SEC failed to provide a “coherent explanation” for why it would allow an ETF for bitcoin futures but not an ETF for spot bitcoin. The spot bitcoin ETF is different from a bitcoin futures ETF in that the spot ETF actually holds Bitcoin, whereas bitcoin futures ETFs are “contracts to buy or sell an asset at a specified price at a later date.”
Because the SEC failed to provide a “coherent explanation” as to why the futures ETF was allowed while the spot bitcoin ETF was rejected, the Court of Appeals held that the SEC acted “arbitrarily and capriciously,” therefore violating the Administrative Procedure Act. In their statement on the approval of the Bitcoin ETP, the SEC referenced the Greyscale decision and stated that based on the ruling from the court, “the most sustainable path forward is to approve the listing and trading of these spot bitcoin ETP shares.”
This announcement was met with much excitement, as anticipation of the SEC’s approval of the bitcoin ETF led to consistent growth in the price of Bitcoin, specifically in 2023, where the price “more than doubled.” On Thursday, January 11, investors began trading Bitcoin ETPs and more than $4 billion of these new ETPs exchanged hands on day one alone. This massive day of trading reflects the reality that these ETFs “are a game-changer for bitcoin” and cryptocurrency generally.
The acceptance of spot bitcoin ETFs will help usher in a safer and more advantageous form of investment in cryptocurrency moving forward.
So why was there so much excitement around these ETFs and how does it impact cryptocurrency generally? First, these new ETFs will be available on Nasdaq, the NYSE, and CBOE, which will make the assets much more accessible. Second, these ETFs will allow investors to “gain exposure to the price of bitcoin without the complications” of owning bitcoin, such as setting up crypto wallets or making accounts with crypto exchanges. Third, since investors are not required to hold the currency themselves, investors can avoid some of the risks of cryptocurrency, such as bankruptcy and scandal in recent years. Instead, ETFs are “listed on tightly-regulated stock exchanges and are therefore accessible through retail investors’ existing brokerage accounts, which are also closely supervised.” Finally, the ETF structure is generally more accessible for institutional investors, since some institutional investors are barred from direct investment in alternative assets. The acceptance of spot bitcoin ETFs will help usher in a safer and more advantageous form of investment in cryptocurrency moving forward.
While the ETF model will make bitcoin investment safer, it does not eradicate all the risks associated with cryptocurrency generally. The SEC Chairman, Gary Gensler, has stated that crypto assets still pose a serious risk due to their volatility. In the statement approving these ETFs, Gensler stated that “[w]hile we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”
While some individuals, such as Gensler, are hesitant to commit to the future of cryptocurrency, others believe that this bitcoin ETF is only the beginning of cryptocurrency’s move towards mainstream finance. For example, some issuers are already considering which cryptocurrencies could be next to gain approval from the SEC for spot ETFs, with Ether and XRP emerging as the most likely candidates. Regardless of what happens next, this approval from the SEC, combined Chairman Gensler’s stance regarding cryptocurrency, demonstrates “a broader tug-of-war between the crypto industry and SEC,” which will likely continue for many years to come.
McLean Waters is a 2L at the University of North Carolina School of Law.