The US is still waiting on its first bitcoin ETF. Here's what experts say the SEC wants to see before giving approval.
- The SEC has started reviewing applications for bitcoin exchange-traded funds, which have yet to launch for trading in the US.
- The regulator will consider bitcoin's volatility and market maturity in rendering a decision whether or not to greenlight the products, experts say.
- The SEC recently pushed back a decision on a bitcoin ETF until at least this summer.
Bitcoin's fast-growing popularity, increasingly elevated profile in corporate America and swelling market capitalization above $1 trillion have retail and Wall Street investors alike questioning if and when a bitcoin exchange-traded fund can be traded in the US. Those questions are currently before the Securities and Exchange Commission which is being asked in at least nine applications for the green light to launch what could be the first cryptocurrency ETF in the country.
But a decision may have to wait at least until mid-June. The SEC this week delayed rendering a decision on a bitcoin ETF from asset manager VanEck that, if cleared, would be listed by CBOE Global Markets. The Commission said it was "appropriate" to take more time for consideration.
The arrival of a bitcoin ETF in 2021 would follow this month's start of trading in shares of Coinbase, the first cryptocurrency exchange to go public, as well as expanding acceptance of bitcoin as payment methods by companies including electric vehicle maker Tesla. Meanwhile, investment bank JP Morgan is preparing to introduce its first bitcoin fund for wealthy clients.
These and other bitcoin developments may signal the increased likelihood that a bitcoin ETF will gain approval, but the SEC has rejected other attempts.
Institutions "are getting in from hedge funds on Wall Street to PayPal, to Venmo, to Visa. So [the SEC] can't really ignore this because the market is deciding that they want to be involved," Ian Balina, founder and CEO of Token Metrics, a data-driven cryptocurrency investment research platform, told Insider.
Here are three hurdles and tailwinds that experts say stand in front of the first US bitcoin ETF:
1) Bitcoin volatility
The world's most widely traded digital asset is well-known for its wild price swings, with gains or losses of 10% during a session not uncommon.
"The SEC has a difficult job balancing the clearly overwhelming desire for the market to have access to BTC via an ETF versus the inherent volatility that the asset class has at this stage in its life cycle," George McDonaugh, co-founder of digital asset investment firm KR1, told Insider. "Volatility would be one of the major considerations. Bitcoin is very scarce and comparatively still a very young asset class. The volatility should dampen over time but that might be long after the market loses patience waiting for [a bitcoin ETF]."
Price volatility has declined in recent weeks and such moves make bitcoin more appealing to institutions, according to JPMorgan.
Liquidity in the bitcoin market had also been a factor under consideration by the SEC.
"I think it's less of a concern now [than] in the early days … and a lot of that is tied to institutional players coming into and creating depth and breadth in the market," Matteo Dante Perruccio, president international of Wave Financial, a US-regulated digital asset manager, told Insider. "If it's 90% retail investors in an asset and you open it up to a bigger universe of retail investors, I think that's a really hard decision to make as a regulator. But it helps you have substantive institutional investors trading and involved in investing in it."
2) Market maturity
"It's fair to say if you look at the denials for the last several ETFs, you can see that there was concern among several of the commissioners that the bitcoin market was not sufficiently regulated and, in their view, was susceptible to manipulation," and "when I say that I mean that manipulation would show up in prices," Amy Doberman, a partner in the securities department at law firm WilmerHale, told Insider.
"I think what you're going to see with the pending requests for approval is an argument that the market is far more developed than it was four or five years ago and that there's a lot more price discovery available than there was even just a few years ago so that there will be the ability to reference actual trades and sufficient information to develop accurate prices," said Doberman.
3) What's on the SEC's plate
The US lags behind other countries in approving bitcoin ETFs, with Canada this year approving the first publicly traded bitcoin ETF in North America, the Purpose Bitcoin ETF, as well as ethereum ETFs. Brazilian regulators have reportedly approved two bitcoin ETFs.
"People underestimate the Canadian approval," said Wave Financial's Perruccio, characterizing as "close cousins" the SEC's relationship with the Canadian securities regulator. "The regulators have got to be talking a lot and ... you always feel more comfortable in company when you are making these bold decisions," and Canada's regulator is considered as well-respected, he said. For a US bitcoin ETF, "I feel like it's inevitable. It's no longer 'if' but 'when' and I think the question of when is probably in 2021. That's my prediction," said Perruccio.
While bitcoin ETF applications pile up, the SEC and its new chairman Gary Gensler have a range of other issues they are working on. Gensler, who was confirmed as chairman earlier this month, is seen by some bitcoin ETF proponents as a cryptocurrency advocate stemming in part from his teachings at MIT on the subject.
Gensler "will have to decide what he wants to prioritize," said Doberman. He's "obviously very knowledgeable about cryptocurrencies and hopefully will bring an additional level of sophistication and appreciation for the currency to the table," she said.
During his confirmation hearing, Gensler said the SEC under his watch would review issues surrounding protection and fairness for retail investors in the backdrop of "gamification" on trading apps and platforms.
The agency is reportedly considering stricter rules to rein in projections made by special purpose acquisition companies, or SPACs, and reportedly has opened a preliminary investigation into leveraged trades at the Archegos Capital Management hedge fund that collapsed in March.
While he's well-versed in the subject of cryptocurrencies, Gensler, who served as a chairman of the Commodity Futures Trading Commission under the Obama administration, will not just wave through bitcoin ETFs applications without scrutiny, said Noah Hamman, CEO of AdvisorShares, a firm that offers actively managed exchange-traded funds through its AdvisorShares Trust.
Gensler will be in the role "of looking at the rules and regs and deciding if either, one, something fits or two, do the rules and regs need to be modified to allow it to fit because it makes sense and it's the right thing to do," said Hamman. AdvisorShares does not have a bitcoin ETF filing with the SEC.