SEC’s Request Suggests that Opposition to Bitcoin ETF May Be Fading

In what might be a sign that is loosening its opposition, the Securities and Exchange Commission (SEC) has requested public comments on a spot Bitcoin ETF proposal.

The agency on Friday requested comments about those issues for a proposal by Grayscale Investments to convert its Grayscale Bitcoin Trust, a public company that has sold shares based on its bitcoin holdings to institutional and accredited investors since 2013, into an ETF. It made a similar request regarding investment manager Bitwise’s Bitwise Bitcoin Trust ETF.

Broad mainstream public interest in bitcoin and cryptocurrency investing has grown substantially in 2021, with research finding that as much as 16% of the U.S. public does or has owned crypto by the end of the year. An ETF would allow mainstream investors to put bitcoin in their portfolios with having to worry about custody of their cryptocurrency, which can be a tricky for people unfamiliar with the workings of cryptocurrency.

In recent months, the SEC rejected several other proposals for a spot exchange traded fund that would track the price of bitcoin directly, including one by Fidelity. That followed a years-long practice, as the agency has long claimed that the bitcoin market and broader cryptocurrency markets, are plagued by price manipulation and fraud, making an ETF a dangerously unsuitable investment for mainstream investors.

Along with fraud and price manipulation, the SEC on Friday asked for comments about the liquidity and transparency of the bitcoin markets.

While requesting public comment is not the same thing as suggesting approval of a Bitcoin ETF, is forthcoming, it is the first time that the agency has done anything but delay and then deny proposals under SEC Chairman Gary Gensler, which approved several Bitcoin Futures ETFs beginning with the ProShares Bitcoin Futures ETF in October.

Just Say No

Gensler has expressed strong opposition to a spot ETF, saying the “markets for actual Bitcoin itself today are largely unregulated,” in a letter to pro-crypto Rep. Tom Emmer (R-Minn.) in November. “This lack of regulatory oversight and surveillance leads to concerns about the potential for fraud and manipulation.”

In November, Emmer and Rep Darren Soto (R-Fla.) wrote Gensler, asking why, if the agency was comfortable approving a futures ETF, it should not also approve a spot ETF.

“We do not understand the SEC’s views around the perceived material difference in risk profiles, since both the futures and spot Bitcoin markets are inherently intertwined and bear the same risks regarding fraud and manipulation,” Toomey and Soto wrote.

Why Grayscale and Bitwise?

Grayscale and Bitwise are interesting choices for the SEC, and would make sense if the agency is seriously considering a path for mainstream investors to put money into bitcoin via public markets. Greyscale has a long track record, and Bitwise addressed the question of price manipulation and fraud very directly in a 2019 ETF proposal.

In that, Bitwise undertook an extensive study of the bitcoin market and concluded that while there was a huge amount of price manipulation, this could be avoided by selecting a basket of trustworthy exchanges — including Coinbase, Kraken and Gemini — on which to base prices.

That said, one of the ETF proposals the SEC rejected recently was from Fidelity, which certainly brings financial expertise and a trusted name to the market.

And the SEC could just be looking for a stronger case for its rejection of Bitcoin ETFs in the face of growing interest by congress and the industry.

Last week, Greyscale launched an ETF tracking Bloomberg Grayscale Future of Finance (BGFOF) index. Focused on companies with exposure to cryptocurrencies — the Nasdaq-listed exchange Coinbase, for example.

Grayscale’s desire to transform its Bitcoin Trust (GBTC) into an ETF has some urgency. Around the time Canadian ETFs were approved, the GBTC swung from selling at a substantial premium over the price of the bitcoins it holds — more than 25% at times — to a discount that has been getting worse. It is currently 27%.