It’s been over a decade since the first bitcoin exchange-traded fund (ETF) application was filed with the SEC. With almost fifty additional applications filed since, including applications from Blackrock, Invesco/Galaxy, Fidelity and others, the United States has yet to approve one. While the road to a spot bitcoin ETF has been long, regulatory developments and broader institutional adoption of BTC as a new asset class signal that the approval of a spot ETF is imminent.
With a U.S. spot ETF, the discussion around crypto becoming a new asset class is over – it de facto is a new asset class that demands an investment thesis from every investor, advisor and institution. With the approval of futures-based bitcoin ETFs in the United States and a call for regulatory clarity handed to the SEC by a federal court, the decade-long wait for a spot bitcoin ETF may soon be over.
The SEC has long rejected bitcoin ETF applications over concerns on market manipulation and failure to adequately protect investors, despite approving the U.S.’s first bitcoin futures ETF in October 2021.
Meanwhile, investors around the world have been given access to spot BTC products, leaving the U.S. behind. Europe, Canada and South America are among the regions that have greenlit spot BTC exchange-traded products. Canadian spot bitcoin ETFs, such as those issued by CI, for example, have already proved more efficient compared to futures products, mimicking direct portfolio exposure to bitcoin without the uncertainty and volatility in pricing that occurs in futures markets.
The question of why the SEC decided to approve of future but not spot ETFs grew from investors and institutions into a question of law in federal court. In August, the D.C. Circuit Court of Appeals ruled in favor of Grayscale Investments’ appeal over the rejection of a bitcoin ETF, stating that the previous rejection was “arbitrary and capricious.” The decision did not compel the SEC to approve Grayscale's ETF conversion, but did shoot down its primary reasons for rejecting it.
No longer able to rely on their usual script, the SEC is forced to either support their denials or new justifications – or let spot ETFs into the U.S. markets.
For the SEC, the former may be difficult to digest. Spot bitcoin ETFs have been available in Canada since early 2021, and Brazil quickly became the second country in the Americas to approve one soon after. London-based Jacobi Asset Management recently launched Europe’s first spot bitcoin ETF on Euronext Amsterdam and is operating successfully under EU-adopted financial regulations like MiCA and additional multinational consumer protection requirements.
Not only has the adoption of spot bitcoin ETFs proven to be successful in other markets, but there’s also a clear need for such a regulated and accessible investment vehicle for consumers. Both inventors and institutions seek secure, direct bitcoin exposure within their portfolios as a means to hedge against global financial uncertainty and provide risk-adjusted returns within a more diversified portfolio. In fact, a recent research report published by Galaxy illustrates that regardless of where investors might source their reallocation from, all portfolios analyzed benefitted from an allocation to bitcoin over the observation period.
In the absence of a spot-traded ETF, one of the only ways Americans can gain direct exposure to bitcoin is through centralized exchanges. Publicly traded crypto exchanges like Coinbase are subject to heightened regulatory oversight and reporting requirements that significantly benefit the protection of its users and investors. Unfortunately, Coinbase is the only centralized exchange publicly listed in the United States.
The collapse of FTX was an $8 billion example of why the U.S. needs a transparent, well-trusted system for direct exposure. With access to user funds and virtually no oversight, FTX was able to pay off billions in loans and quietly sell millions in bitcoin to try to control its price – all at the expense of their users. Not only does an ETF increase accessibility for investors to gain exposure to bitcoin, but it also offers significant consumer protections through the well-trusted reporting and compliance requirements that the U.S. has applied to ETFs over the past 30 years.
Without the evidence to support denying ETF applications on the basis of consumer protection and a trove of evidence against this argument, the SEC is left with only one option.
The adoption of bitcoin spot ETFs in major international markets like the Toronto Stock Exchange, Euronext Amsterdam and Brazil’s B3 exchange has already proven the effectiveness, stability and value of a clearly regulated method for adding BTC to portfolios.